Shuvam is a financial writer and has avid knowledge of the unsecured lending industry of the United Kingdom.
In August 2018, Wonga, the leading payday loan lender in the UK, literally ran out of “wonga”. In any line of business, the collapse of the leading player causes major disruption and ripples. And, after Wonga entered into administration, other payday and short-term loan lenders became the target of complaints.
High-Cost Short-term Credit: The Marketplace
In 2006, the number of people taking out payday loans in the UK was small. They were only available from specialist high-street outlets and pawnbrokers. They were known at the time as “cheque cashers”.
The way it worked was that you’d write yourself a cheque for the amount you needed —you’d get the money in cash straight away. Then the cheque casher would write a cheque for the amount you’d borrowed plus a fee and this cheque would then be cashed on your next payday.
Dial forward a few years and millions of Brits had little mini-computers they carried around with them called “smartphones”. Wonga was among the first to marry together the computing power in your pocket and a very complex algorithm designed to measure how likely someone would be to pay back a loan borrowed over up to 30 days. A decision could be made almost instantly and within an hour, the money would appear in your account.
For the generations, which grew up before the smartphone, this was a revolution. For everyone else, this became a new and easy way to borrow money. The loans were expensive but they were convenient for borrowers who needed cash short-term to cover an emergency.
For years, newspapers and news websites were full of stories about the level of interest charged by payday lenders together with stories on how they behaved towards borrowers who fell into arrears.
The Government felt that it was time for a change.
The Big Changes to the Market in 2016
Although all lenders previously had to be awarded a licence from the Financial Conduct Authority, from 2016, tough new qualification tests were put into place for companies wanting to continue offering payday loans.
Payday lenders would now have to follow five golden rules:
- Interest must be capped at 0.8% per day (that’s 80p for every £100 borrowed).
- If a borrower defaults, they can’t be charged more than £15.
- If a payday lender tries to collect money twice without success from a borrower’s bank account, they can’t make any further attempts without the permission of the borrower.
- If a borrower’s loan becomes unaffordable, a payday lender must point them in the direction of a charity, which can appoint someone to represent the borrower in negotiations to pay the loan back.
- The total amount a borrower pays for their loan in interest and charges must not be more than the amount of money they borrowed in the first place.
Compared with what went before, these were difficult for most payday loan companies to comply with. As a result, many of them dropped out of the market.
Borrowers Complain in Big Numbers Against Wonga
By this time, claims management firms and solicitors’ practices started to encourage payday loan borrowers to complain against Wonga and other firms. Complaints were made if the borrower felt that proper affordability checks hadn’t been carried out either when the first loan was applied for or on subsequent loans.
Borrowers would first write to Wonga and if Wonga’s reply was unsatisfactory, they would then complain to the Financial Ombudsman Service.
What actually caused Wonga’s collapse is that so many people complained to the Ombudsman. For each complaint, Wonga had to pay a £550 case management fee. This £550 was the fee even before any compensation to the borrower was calculated and paid for. In the end, the number of £550 charges proved too much for them, despite an emergency cash injection of £10m in early August to help them financially cope with the fees.
Complaints Against Payday Lenders Rise
Despite the new rules being enforced on payday lenders from 2016, complaints about payday lenders have continued to rise—by 80% in the first six months of the year.
Even though the industry is far better behaved than ever before, borrowers now feel much more empowered to make complaints when they feel they have been unfairly treated.
Using a Broker to Find the Right Payday Loan Solution
The more the customers complain, the better payday loan companies will understand what they’re doing right and what they’re doing wrong. Whatever the line of business, things work better when customers and companies respect each other and understand what’s important.
Try finding a loan broker, which is authorised by the Financial Conduct Authority (FCA) because this ensures transparency in the deal. Explore various options available online for your loan and compare the deals. Map out your repayment structure and then settle down for a loan that is best suitable for you.
The FCA is the regulator for more than 58,000 businesses in the United Kingdom. It protects consumers by keeping the finance industry steady and encouraging healthy competition between financial service firms. It plays a central role in the financial wellbeing of most of the people in the UK.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2019 Shuvam Samal