Wonga: So Wrong-a
American readers may not yet have heard of Wonga, but my guess is they soon will. In the UK you know Wonga well, and Wonga entered the Canadian market in 2011. It operates in South Africa too. Given the prospective market, one would guess the U.S. must also be on Wonga’s radar.
What Does Wonga Do?
The company’s tagline is
“Flexible, short term loans that give you lots of control.”
From its Canadian website, Wonga says
“Wonga is a ground-breaking online lender founded in the UK and serving you from our Canadian headquarters based in Toronto. … Our mission is to solve people’s short term and urgent cash flow problems with an equally short term and responsible solution.”
In other words, Wonga.com is an Internet-age payday lender, albeit smartly dressed, nicely groomed, and well-spoken. No gaudy neon signs here.
How Does Wonga Work?
Wonga.com’s strategy is to make borrowing money very easy. You can, if approved, pick up a quick $500 ($1,500 once you’re an “existing customer”) with a few keystrokes. This nifty tool dominates the site’s homepage:
You move those two sliders back and forth (the screen shot above isn’t functional—go to Wonga.com to try it) until you settle on how much you want to borrow and for how long. I admit working the sliders is amusing. And they apparently comprise the “lots of control” Wonga’s tagline references.
How Much Does Borrowing From Wonga.com Cost?
Very good question! Let’s do the math in the example given in the screenshot above.
Interest & fees = $28.48
Term = 11 days
Principal borrowed = $335
(Time out for a moment. At just the sanity check level: Would you agree that financial security is an unlikely destiny of anyone willing and able to pay $28.48 to borrow $335 for just 11 days?)
To express Wonga’s interest & fees in terms of Annual Percentage Rate (APR)—the standard comparison metric for loans (though Wonga argues APR isn’t appropriate for its lending—more on that below):
→ Daily interest & fees = $28.48 ÷ 11 days = $2.59 per day
→ Annualized interest & fees = $2.59 per day × 365 days per year = $945 interest & fees per year
→ APR = $945 interest & fees ÷ $335 borrowed = 282%
Suddenly the reason Wonga argues that APR isn’t an appropriate measure of its service becomes excruciatingly clear: Wonga.com lends money at the equivalent of triple-digit APRs!
Some talented marketing and public relations folks have slaved over the “Educate” section of Wonga.com, and I do give them credit. I think they’ve done about as good a job as can be done in lipsticking a pig, the best I’ve seen since Sarah Palin’s nomination for Vice President. From Wonga’s website:
APR is a useful measure for considering and comparing many traditional loans, where you’re looking to understand the comparative value and cost over several years. But it’s not the only thing you should make your judgements on and you should always make sure you understand the actual cost – the total amount to repay – for any loan you’re considering. There are also some circumstances – such as loans of less than a year – where APR is not a straightforward or clear comparison tool to use. [emphasis added]
In the case of Wonga, we only provide loans of up to thirty days, whereas APR was designed to standardise the interest rates charged for loans of several years, or ongoing credit card balances. We provide the representative APR, but we also believe the most useful information for a short term cash advance of this kind is the total cost of the cash you want to borrow. So we provide all the information as clearly as possible and trust you to make your own judgement about what’s good value and how much is worth paying. After all, no-one else provides such a fast, convenient and flexible service as we do!” [You left out “costly”—Money Counselor]
In the sentence I’ve highlighted, Wonga doesn’t argue but rather asserts that APR is not a good tool to use to compare loans with terms of less than a year. Why? I think APR, combined with “points” or the equivalent, is the best tool to compare the cost of loans of all types and terms. However, I can certainly appreciate that parties lending money at the equivalent of 282% APR would advocate an alternate viewpoint!
Here’s my favorite gem from Wonga.com:
“If you consider the APR on a Wonga cash advance actually goes up as the term – and therefore the cost – comes down, you might appreciate the potential for this measure to confuse!”
I’m confused, all right. Let’s dissect this highly dissectible sentence:
“…the APR on a Wonga cash advance actually goes up as the term…comes down…”
In plain English, this means that Wonga’s interest & fees per day increase as the number of days for which you borrow decreases. So, presumably, borrowing $500 for 30 days costs less per day than borrowing $500 for 15 days.
I admit to daydreaming through most of Marketing 101, but could someone please explain to me: Why is this a point in favor of Wonga’s anti-APR stance? And what’s confusing about the mathematical fact that Wonga.com’s APR on a 15-day loan is greater than its APR on a 30-day loan?
I think Wonga is saying that the 15-day loan might cost me ‘only,’ say, $30 while the 30-day loan might cost me $50, so I’m supposed to feel good about the cheaper ($30 isn’t much, eh?) 15-day loan and ignore that its APR may be 300% compared to 250% for the 30-day loan (and compared to 7% I might get at the credit union). Huh? Isn’t this a bit like being asked to appreciate a prostate exam because the doctor’s hand could be even larger?
More Wonga Crapola
Wonga’s preemptive strike on critiques of its business model occupies the homepage of Wonga.com’s Educate section:
Wonga is here to help with occasional cash flow problems – when you need a short-term cash advance to tide you over for a few days or weeks – but our service shouldn’t be used to manage existing debt or as a regular source of ongoing credit. If you’re already feeling the strain financially, please be aware that a Wonga loan will only add to your commitments because it must be repaid within 45 days. Always think carefully before committing to any form of credit and, if in doubt, seek advice before making any decisions.
This feel-good drivel drove me into a hot shower to cleanse myself.
Here’s what I think: Payday lenders’ lifeblood, their source of profits, and the key to their business success are repeat customers who borrow the same $500 (or whatever) over and over and over, paying huge interest and repeated fees each time they renew their loan, because they’ve been lured into a trap cleverly positioned and promoted by the Wonga-types of the world. I think that if the majority of payday lenders’ patrons were truly “occasional” customers, the industry would cease to exist because it wouldn’t be viable financially due to low loan volume.
I invite Wonga to send independently audited data to Money Counselor documenting that the majority of its business comes from occasional, not serial, borrowers. (Said differently, does Wonga’s actual market match its claimed target market?) If I’m wrong, I’ll publish a clarification here along with an image of me kissing the Wonga logo. Or, if Wonga would like to send a short, fact-based counterpoint to this article, I’ll publish it.
What Do You Think of Wonga.com?
Have you suffered the financial misfortune of borrowing from Wonga.com or another payday lender? What do you think of Wonga’s clever re-packaging of an age-old business model?