Stand and deliver
Posted: Mon Jun 24, 2013 1:09 am
Payday loan giant Wonga has increased the interest rate it uses to illustrate the cost of borrowing to 5,853 per cent – a rise of 1,600 per cent. The move has triggered more calls for tighter regulation of an industry that cashes in on hard-up borrowers.
Most customers of payday loan firms only take out small amounts over a short period to tide them over until they get their salary.
But lenders are required by law to give a representative annual percentage rate of interest (APR), setting out what the loan would cost over a year, so customers can make comparisons with other firms easily to find the cheapest deal.
Wonga used to give the example of a £207 loan over 20 days, with interest and charges of £47.42 and an APR of 4,214 per cent.
But it now uses a new example of someone borrowing a smaller sum of £150 for 18 days, with interest and charges of £33.49 and an APR of 5,853 per cent.
Wonga has not actually increased its charges or interest rates, but says it has voluntarily changed the loan example it uses on its website as a better reflection of how customers borrow.
The firm argues that the APR calculation, which makes assumptions about borrowing money over a full year, is not the best way to illustrate the cost of its loans to customers.
A spokesman said: ‘We made the change as the way our customers are using the service has changed.
On its website, it tells customers: ‘While shorter Wonga loans cost less in real terms for our customers, this trend means a bigger representative APR. It’s crazy but true.’
Wonga and the 49 other biggest payday loan firms have been put on notice by the Office of Fair Trading (OFT) to improve the way they agree loans, provide information to customers and chase debts.
Some customers have been given loans without proper checks that they are earning and can afford repayments.
Others have been allowed to roll over short-term loans several times, pushing interest charges to punishing levels.
Several firms have used heavy-handed tactics to chase debts.
Earlier this year, it emerged that a father killed himself after being harassed by payday loan firms demanding repayments.
Anthony Breeze, 36, from Bolton, burned to death after dousing himself in petrol and setting himself alight.
A Citizens Advice study found the firms are fuelling debt and misery by lending to the vulnerable, including people who are drunk, the under-18s and the mentally ill.
Its chief executive, Gillian Guy, said: ‘High interest rates are just one of the problems people face when taking out payday loans – hefty charges, rollovers and having their bank accounts drained, leaving them in serious financial hardship and struggling to repay money they’ve borrowed. His band is looking better...
