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I saw an advert for Wonga the other night and noticed the fine print >4000% APR and almost fell out of my chair. The article explains it though, and I'm less c

I saw an advert for Wonga the other night and noticed the fine print >4000% APR and almost fell out of my chair. The article explains it though, and I'm less concerned for clueless borrowers running up 40k in a year :)

JoachimSchipper 16y ago
Loans are less dangerous when they're small, short-term and have to be repaid, yes; but the rate is still high (you'd have to repay GBP 461 for a GBP 400 two-week loan, to grab some numbers from the article.)
- yummyfajitas 16y ago
  They also have a 10% default rate. So just to break even, they need to charge 440 GDP.
  - bryanlarsen 16y ago
    They don't lose the full amount on all defaults. Many will pay back eventually, even paying some penalties, providing higher profits. As the article mentions, it's the defaults where traditional providers make most of their money. Defaulted loans are almost always worth something. They can be sold to collection agencies, who typically buy them at around 10 cents to the dollar.
    - yummyfajitas 16y ago
      Well, they certainly aren't making money by lending $100, waiting for a default and then selling the loan for $10. But you are right, the article does make the claim that defaults are profitable. I missed that on the first read. So I guess maybe most defaults are just late payments or something? Do you have any more info on this?
      - JoachimSchipper 16y ago
        If someone defaults, you keep charging 4000% interest, and three months later "cut a deal" to have them only repay half of what they now owe, you've still received 125% of the amount they borrowed. I'm not sure about the exact numbers, but you can see how even defaults could be profitable.
  - gadders 16y ago
    I have a friend that is a research analyst in a bank that covers "Other Financials" (i.e. companies like Wonga that aren't traditional banks). He mentioned a company (similar-ish to Wonga) that does Home Credit - i.e. people going round door to door in poor areas lending money and collecting on a weekly basis. These companies typically charge 183% APR. The Joseph Rowntree Foundation (a UK charity) did some research to see if they could provide the same service on a non-profit basis. They found that with a government subsidy of £18m, they would still only be able to get the interest rate down to 123%. This is due to the large number of defaults and other costs. http://www.jrf.org.uk/blog/2011/02/will-capping-cost-credit-help-people-poverty http://www.jrf.org.uk/blog/2011/02/will-capping-cost-credit-... I thought this was interesting - what seems like an outrageous rate really doesn't always translate into outrageous profits.
sethg 16y ago
If I needed $750 more than I had in the bank, and knew I could pay it all back in a month, I would put some of my expenses on plastic. Back when I was fresh out of school in a not-very-well-paying job, and had recently completed a debt management plan to pay off the bills I had run up as an undergrad, I got plenty of unsolicited offers for credit cards; eventually I had something like a total credit line over $10K with interest in the 20–25% range. So who are these people out there who “need” short-term credit so badly, and yet can’t find anyone to loan to them at anything short of quadruple-interest rates? Is it really good for society to have a company fill this “need”? (Just to forestall flag-waving about contracts between consenting adults being sacred: The banking system, without which easy credit would be impossible, is even more dependent on the state than other kinds of private industry. As the de facto lender of last resort, the state has a legitimate interest in what kinds of lending it permits among its citizens.)
- VladRussian 16y ago
  they prey on the people like a single mother of five trying to make to the payday and who isn't in the state of mind to do the math or other people in the similar "impaired" [for the lack of a better word as i don't mean narrow drug/alcohol impairness] state of mind.
gadders 16y ago
The APR is a ridiculous amount, but you're not supposed to borrow over a year. It's a bit like saying that "Based on weekly rental rates, it would cost me £50,000 to rent a [insert basic model of car here] for a year! What a rip-off! I could buy one cheaper than that!"
- sethg 16y ago
  Credit card “convenience checks” charge a 2–5% fee on top of the regular cash advance interest rates. Annualized, that’s still under 200%.
retube 16y ago
Dude. This is nothing. Barclays charged me £22 for going £10 into my "reserve" overdraft for just 24 hours. Which is some completely absurd annual rate, 10^184 % if my quick calc is correct (220% daily rate compounded for 365 days).

JoachimSchipper 16y ago

Loans are less dangerous when they're small, short-term and have to be repaid, yes; but the rate is still high (you'd have to repay GBP 461 for a GBP 400 two-week loan, to grab some numbers from the article.)

yummyfajitas 16y ago
They also have a 10% default rate. So just to break even, they need to charge 440 GDP.
- bryanlarsen 16y ago
  They don't lose the full amount on all defaults. Many will pay back eventually, even paying some penalties, providing higher profits. As the article mentions, it's the defaults where traditional providers make most of their money. Defaulted loans are almost always worth something. They can be sold to collection agencies, who typically buy them at around 10 cents to the dollar.
  - yummyfajitas 16y ago
    Well, they certainly aren't making money by lending $100, waiting for a default and then selling the loan for $10. But you are right, the article does make the claim that defaults are profitable. I missed that on the first read. So I guess maybe most defaults are just late payments or something? Do you have any more info on this?
    - JoachimSchipper 16y ago
      If someone defaults, you keep charging 4000% interest, and three months later "cut a deal" to have them only repay half of what they now owe, you've still received 125% of the amount they borrowed. I'm not sure about the exact numbers, but you can see how even defaults could be profitable.
- gadders 16y ago
  I have a friend that is a research analyst in a bank that covers "Other Financials" (i.e. companies like Wonga that aren't traditional banks). He mentioned a company (similar-ish to Wonga) that does Home Credit - i.e. people going round door to door in poor areas lending money and collecting on a weekly basis. These companies typically charge 183% APR. The Joseph Rowntree Foundation (a UK charity) did some research to see if they could provide the same service on a non-profit basis. They found that with a government subsidy of £18m, they would still only be able to get the interest rate down to 123%. This is due to the large number of defaults and other costs. http://www.jrf.org.uk/blog/2011/02/will-capping-cost-credit-help-people-poverty http://www.jrf.org.uk/blog/2011/02/will-capping-cost-credit-... I thought this was interesting - what seems like an outrageous rate really doesn't always translate into outrageous profits.

sethg 16y ago

If I needed $750 more than I had in the bank, and knew I could pay it all back in a month, I would put some of my expenses on plastic. Back when I was fresh out of school in a not-very-well-paying job, and had recently completed a debt management plan to pay off the bills I had run up as an undergrad, I got plenty of unsolicited offers for credit cards; eventually I had something like a total credit line over $10K with interest in the 20–25% range. So who are these people out there who “need” short-term credit so badly, and yet can’t find anyone to loan to them at anything short of quadruple-interest rates? Is it really good for society to have a company fill this “need”? (Just to forestall flag-waving about contracts between consenting adults being sacred: The banking system, without which easy credit would be impossible, is even more dependent on the state than other kinds of private industry. As the de facto lender of last resort, the state has a legitimate interest in what kinds of lending it permits among its citizens.)

VladRussian 16y ago
they prey on the people like a single mother of five trying to make to the payday and who isn't in the state of mind to do the math or other people in the similar "impaired" [for the lack of a better word as i don't mean narrow drug/alcohol impairness] state of mind.

gadders 16y ago

The APR is a ridiculous amount, but you're not supposed to borrow over a year. It's a bit like saying that "Based on weekly rental rates, it would cost me £50,000 to rent a [insert basic model of car here] for a year! What a rip-off! I could buy one cheaper than that!"

sethg 16y ago
Credit card “convenience checks” charge a 2–5% fee on top of the regular cash advance interest rates. Annualized, that’s still under 200%.

retube 16y ago

Dude. This is nothing. Barclays charged me £22 for going £10 into my "reserve" overdraft for just 24 hours. Which is some completely absurd annual rate, 10^184 % if my quick calc is correct (220% daily rate compounded for 365 days).