Wonga is one of many payday loan providers to argue that unauthorised bank overdrafts are more expensive.
11:21AM GMT 07 Dec 2011
60 CommentsWonga, the short-term loan business, has long argued that it is more transparent than the banks.
Earlier this year Errol Damelin, the founder of the company, told The Telegraph that customers could not compare the cost of borrowingmoney in the short term when the most common way of doing it was through a bank overdraft.
Wonga is forced to display a representative annual percentage rate (APR) for its loans of 4,214pc. However, Mr Damelin said that, because it offered loans limited to 30 days, the APR was not relevant, and the loan was often cheaper than unauthorised bank charges for the same amount.
"There is a place for an APR, but we don't offer a loan that rolls up for a year so you are comparing an impossible product," he said. "Also, it is not used by the banks so customers cannot compare in a normative way."
It warned that there were no effective price comparison services for current accounts. It added that some experts believed companies "design complex tariffs and pricing structures to decrease the ability of consumers to compare prices".
Mr Damelin said complex overdraft charges and structures meant that the majority of bank customers "never understand what they are going to pay" when they go overdrawn.
In some cases, despite Wonga's expensive 4,214pc APR, it can be cheaper to take out a short-term loan. For example, if you have an Everyday Current Account with Santander and become overdrawn it can cost you dearly. If you go into your unarranged overdraft and are overdrawn for two days in a row, and two payments come out of your account in that time, it will cost you £60. If you borrowed £100 from Wonga for 15 days to avoid slipping into overdraft, you would be charged £21.11. If you borrowed that money for two days, it would cost you £7.50.
However, the problem comes if you cannot pay back your Wonga loan within a short time period. You will incur a missed payment fee of £20 if the money is not available on the day you have nominated to pay it back and they will then charge you a maximum of 60 days' interest at 1pc a day.
Mr Damelin said customers needed to be able to compare the two types of product in order to make a decision, a comment echoed Sir John Vickers banking commission report published this year. The report said price comparison sites did not really work for bank accounts, and consumers did not know whether they could get a better deal elsewhere.
Mr Damelin said there needed to be more competition in banking in order to meet customers' needs, saying that the Government was not encouraging new entrants into the banking market.
Wonga's own model is based on a complex algorithm and credit checking process, rather than a human assessment of payslips and address details, as with many payday loan companies. Each loan application is assessed entirely by a computer.
Wonga, which sponsors Blackpool Football Club, is keen to avoid the sobriquet of "payday loan company", and says its borrowers are not vulnerable customers who struggle to pay back the money that they have been lent. Instead, it describes them as mainly tech-savvy young professionals. Less than a quarter of the company's customers have previously used an equivalent online or short-term loan product before coming to Wonga. Instead, they're coming from the banks and traditional credit products.
Every single Wonga customer has a bank account, debit card, internet access and a mobile phone. The company's loans of up to £400 are available for one day to a month, and interest is charged at 1pc a day. The vast majority of customers can access other forms of traditional credit, such as loans and credit cards. For many, Wonga is an alternative to a long personal loan that they could not pay back early because of repayment penalties, or an overdraft fee.
Mr Damelin said the company allowed people to pay back the money whenever they wanted to without charging them extra. Seven in 10 loan applicants are rejected, and the company credit checks with major agencies before deciding whether to accept applications.
That did not stop Stella Creasy MP from denouncing the company for "legal loan-sharking". She wants interest rate caps on payday lenders, which Mr Damelin said he did not support. Wonga hit back at Ms Creasy's remarks. In a public letter it said that accusing it of being a legal loan shark might make for good press copy, "but it underplays the fact that our company is a legitimate and well regulated one – under legislation overseen by the Office of Fair Trading and the Department for Business, Innovation & Skills".
SHOULD YOU USE WONGA?
Wonga may be transparent, but a loan that costs you 1pc a day is only a good idea if the alternatives are more expensive. If you have a liquidity crisis there may well be cheaper options, especially if you are in good standing with your bank. The scenarios below explain when a Wonga loan, or similar, is a decent option, and when it isn't.
USE WONGA IF
• You have a bill going out that will take you over your limit and the alternative is a hefty overdraft charge. This only applies if you are about to receive the cash to pay the bill from a reliable source.
• You can't convince your bank to give you a cheap authorised overdraft.
• A cheque is about to bounce and you will be charged for it.
• The alternative is a long-term loan which you know you won't need for more than a few weeks.
NEVER USE WONGA IF
• You have a shortfall in day-to-day living expenses and want to cover it.
• You need a loan that will take a while to pay back.
• You have a 0pc credit card that you could put the debt on instead.
• Your bank will give you a cheaper authorised overdraft.
