I feel quite pleased that Wonga went into liquidation. I am sad for their employees (as we all have families to support) but I am sure the directors will walk away with their egos bruised and millions from ill-gotten gains. Companies like Wonga are effectively no more than legalised loan sharks.
Looking at a quick comparison between payday loans for short-term loans the APR varies from 500 per cent to just under 1600 per cent a year. A survey by the Royal Society for Public Health ranked payday loans as having the most detrimental effect on mental health well-being. There are nightmare stories of people who have up to 8 payday loans to service their debts. On average people hold three payday loans at a time. Agencies that support and assist people with payday loans relates to loans that are over 100 million pounds for well over one hundred thousand people. Those in poverty already pay a poverty premium (the poverty premium is calculated to cost a low-income family on average £490 a year) therefore reducing costs from any spend is crucial for them as it allows more cash in their pockets. Increased inflation and low wage increases hurt low-paid families disproportionately and they are the ones most likely to use payday loans.
We can learn from the US here; fifteen states have banned payday loans. Although, in the UK, we have capped loans I for one would be in favour of a similar ban. However, we need to tackle payday loans, excessive credit card rates and charges from unauthorised bank overdrafts (I remember that at one time a large high street bank was changing equivalent to 4,500 per cent APR for an unauthorised increase to an overdraft). Limiting the harm payday loans can do is now even more important because of increased wealth inequality and a shrinking welfare state.
What can be done to assist those who take out (or are thinking about taking out) payday loans? I would like to see interest charged by credit cards and payday loan companies to be capped further. I would cap it to no more than 50 per cent APR (my personal preference would be to ban such companies altogether – but that is unlikely). I would support a more significant role for and access to Credit Unions. People should get more support to access agencies (like National Debt Relief) that assist them to get out of or ease their debt burden. There needs to be better data sharing in the industry to stop people from taking on more than one payday loan. The government should caution and better inform the public about the dangers of payday loans.
* Tahir Maher is the Wednesday editor and a member of the LDV editorial team