We recently covered the news that Wonga was being gradually wound up after a series of declared losses. Today, the payday loans lender is still in some fairly serious trouble but may have a saviour in the most unlikely of forms. In what must be a fairly unusual move, the Church of England has considered stepping in to buy Wonga’s debt book in order to stop this from falling into the wrong hands. The idea is to prevent more borrowers being further exploited by what MP Frank Field called “another loan shark.” So, how might Wonga’s transition to the side of the angels actually work?
Selling Wonga on at a “knock down rate”
Wonga’s £400m loan book is ripe for exploitation as a result of the desperate state of the company. Many – such as MP Frank Field – have suggested that this could well result in it being sold off at a knock down rate to another lender looking to squeeze cash from it. For those who currently owe Wonga money that could leave the door open to exploitation. It’s this exploitation that Frank Field is trying to avoid by appealing to the Church of England to buy the Wonga loans book and protect the 200,000 lenders that would be affected. The Church is uncertain about whether it is best placed to become involved.
Why should The Church step in?
Effectively, if the Wonga loan book is sold on at a discount to another lender it could leave current borrowers in a difficult position. A new lender could (and very likely would) raise the interest rates that are applied to existing loans, which would make these loans even more unaffordable. The Church of England has an £8.3bn investment fund (something that may come as a surprise to many…). Given the resources at its disposal, is there any way that this could be used to help “liberate” the poor, as Frank Field put it? According to a representative of the Church of England, it is meeting soon to discuss its options in terms of a response. As the Church of England was recently revealed to have shares in Amazon – which it is refusing to give up despite Archbishop Welby previously saying Amazon was “leeching off the taxpayer” – many are hoping it will bail out Wonga, if only to silence those who have been critical of where the church spends its cash.
What does the short-term borrowing market look like now?
Although Wonga has gone as a borrowing option for consumers there are still many other lenders out there who are willing to supply short-term credit. However, a huge increase in claims against payday lenders – driven by claims management companies – could change the landscape of this financial market for good. It was the volume of claims against Wonga that eventually brought the firm down and a wide range of other short-term credit lenders could share the same fate. If the majority of these lenders didn’t survive the tsunami of claims heading this way, what would the market look like?
- A lack of available credit. Despite all the criticism of short-term lenders they do provide credit to borrowers where other lenders will not. Without that availability of credit it’s difficult to see how those with low incomes and/or poor credit ratings will be able to obtain finance.
- The bank of mum and dad. According to the Financial Conduct Authority’s Financial Lives survey, 3.6 million people (7% of UK adults) are borrowing from friends and family, which is more than the 6% borrowing from payday loans lenders. This number could double without a short-term credit alternative to the likes of Wonga. However, the Bank of Mum and Dad does not offer endless resources and, as has recently been highlighted, could soon run dry
- An increase in borrowing from illegal lenders? The worst case scenario may well be that, with the loss of lenders such as Wonga from the market, illegal lenders, such as loan sharks, move in to fill the gap where mainstream lenders are not willing, or able, to do so.
- The emergence of a new type of short-term credit. The market as it stands does offer other options for those who don’t have the kind of credit history that would enable borrowing from a mainstream lender. Guarantor loans, for example, provide an opportunity to borrow where a friend or family member is willing to guarantee the repayments if necessary. We could also soon see a new type of short-term credit lender providing a different type of deal that sits somewhere between the payday lenders of old and the typical high street lender with their more stringent conditions but lower interest rates.
The Wonga story continues to unfold and many are waiting to see how this is going to affect the market as a whole – the rest of this year could be critical for Wonga borrowers.
- An honest approach to short term lending
- Why people will always need short term credit
- Are doorstep loans right for you?