JJust a few years ago, payday loans, which offered sky-high-interest loans to keep the borrower until the next payday, were a small business. Today it is worth over £ 800 million a year. Millions of our fellow citizens are so close to financial advantage that they will accept absurd interest rates, paying, say, £ 37 of interest over 30 days to get a quick £ 100. And that’s before the default rates. This is old-fashioned usury on a grand scale, a sign of the despair of too many in Britain and a willingness to pander to ruthless capitalism.
So it was good news that last week the country’s largest payday lender, Wonga, after negotiations with the newly created Financial Conduct Authority (FCA), agreed to write off £ 220 million of debts from 330,000 of its borrowers who have been in arrears for more than 30 days. It would never get the money back and its new president, Andy Haste, agreed that the loans should never have been made to clients whose ability to pay should have been better tested. An additional 45,000 borrowers who have not made payments will not be required to pay interest.
Indeed, Haste’s withdrawal was well judged, as was his recognition that the company needed to change. Wonga It had already decided that it would have to write off £ 185 million of debt before the FCA intervened, so the additional £ 35 million was a small price to pay to dispel some of the criticism.
Payday loans are a cutting edge business. The lender knows that many of its borrowers will never repay the loans. Usurious interest rates create the profit cushion that allows payday lenders to accept bad debt that normal lenders would find unacceptable. In 2012, a much smaller Wonga wrote off £ 126 million and still made a handsome profit of £ 84.5 million (before tax). Even after these latest write-offs, it’s still a very viable business.
However, change is underway. Starting next January, a payday lender will be limited to charging a maximum of £ 24 for every £ 100 of debt it lends over 30 days, along with a cap on default penalties, reducing Wonga’s margins. by a third. You will also have to lend in a more discriminating manner, further verifying that borrowers have the ability to repay the loan; and you will not be able to continue refinancing the debt with all the corresponding charges. The goal is that no one should pay more in interest and fees than the original amount they borrowed, so we are all expected to offer a collective sigh of relief. But these wolves are still wolves and the social realities that brought them to life remain as acute as ever.
Because, during his seven years of life, Wonga has managed to demonstrate almost all the dysfunctions in British society. There would never have been such a large market for what is euphemistically called “expensive short-term credit” if the wages of the majority of Britons had continued to grow in real terms. Wonga grew as real wages stagnated.
The under-30s experience, one of the most important markets for payday lenders, is even worse. Since 2008, real wages 14% of the 18 to 25 year olds have submerged and 12% of the 25 to 29 year olds. In desperation, hundreds of thousands of young people have turned to payday lenders to maintain their standard of living. The tragic stories of people overwhelmed by debt are often those of twenty-somethings whose income plummeted has forced them into the arms of a payday lender.
There has been no systematic response. The fall in real wages is attributed to immigrants from the EU, when the real culprit is more outdated: workers in general, and young workers in particular, have not organized enough to offer countervailing power in the market. labor. It is not technology, globalization or immigration that has caused such a widespread collapse of real wages, it is the weakness of the unions.
Nor is it the only weak British institution. Traditional banks, hit by the credit crunch, have been withdrawing their loans, backing only good credit risks. Substantial social lenders, such as cooperative banks or mutual building societies, built with great effort since the 19th century to support the credit demands of ordinary people with ordinary incomes, have withered on the vine. Either they have lost their way, as the cooperative did, or they have been demutualized when the directors paid to enrich themselves. The last line of defense is about 500 credit unions with about a million members.
Like payday lenders, they offer short-term unsecured loans, but it’s a different universe. The FCA proposes starting next January to limit the interest rate that payday lenders can charge to 0.8% per day – credit unions can only charge 3% interest per month! The problem is that to be eligible for a loan you have to join the credit union showing a common bond with the other members: living in the neighborhood, sharing the same profession or faith. And then you have to save for a while before you are eligible for a loan – not much use for a struggling twenty-something who is in dire need of money.
Payday lenders intervened in the gap. Founder of Wonga Errol damelin, who stayed out of running the company for the summer, was careful to dial in all the modern pro-business phrases when he launched his company. It was a “disruptive” business that challenged sleepy headlines with smart algorithms that would process credit risk faster. In fact, their technology simply made money flow into applicants’ bank accounts faster, charging outrageous interest rates. Its own shares were located in the British Virgin Islands, and Wonga’s growth pleased its private equity and venture backers. It was an amoral world in which everything was going well, including the famous harassment of delinquent borrowers with threatening letters of imaginary lawyers.
Wonga’s wings have been clipped, proof that opposition forces still exist. Labor MP Stella Creasy’s campaign on the evils of payday loans showed that there was still some life in the Labor Party, while Justin Welby did. you too on behalf of the Church of England. The FCA has also shown that he has some teeth. But they are a very fine red line. Because the underlying forces creating the demand for payday loans are as acute as ever and Wonga owners continue to want their pound of meat.
If Britain wants to get to the root of this problem, it will have to act more deeply. We need stronger unions, substantive social lenders, a more generous social agreement and companies to accept it must have ethics, not everyone is welcome in the current climate. But that doesn’t mean we don’t need them. Wonga is a symptom, not a cause.