The news that Wonga have gone into administration will be a cause for rejoicing across the country. Not least in Lambeth Palace, as Justin Welby, Archbishop of Canterbury must be able to take some of the credit for the collapse, His high profile intervention precipitated the beginning of the end for the notorious payday lenders, heralding a catalogue of investigations into inadequate procedures of assessing affordability and unethical debt recovery topped off with government legislation capping extortionate interest rates.
The King is dead, long live the King
Unfortunately it may be a case of ‘the King is dead, long live the King’ as a quick google search will provide a list of the top forty payday lenders. While Wonga may no longer be top of the pops there are plenty of ‘short term lenders’ as the payday operatives prefer to be called, still out there offering loans at four-figure interest rates to tide you over for a couple of weeks.
Because that was always the argument in defence of the payday loan. That they were designed to be a solution to a temporary cash flow problem such as starting a new job, waiting for a refund of a rental bond, or a cheque to clear. Yes, they were expensive but surely, they reasoned, it was better to borrow £300 and repay £375 than to bounce a direct debit and incur bank charges and/or default on your mortgage (and suffer the consequences that might damage your credit score and future credit worthiness).
For many people financial shortages caused by changing jobs or moving house are few and far between, so this justification of the payday loan market really doesn’t wash. Instead borrowing from a payday lender becomes a way of life, if you borrow £300 because you are short the week before payday, then unless you have the means of increasing your income it stands to reason that the same time next month you will be at least £375 down and so on.
No such thing as a ‘Quick-Fix’?
At their peak, Wonga were enormously successful. Why? Sadly because they, and other lenders like them, appealed to the desire for a ‘quick fix’ to money problems. As anyone who has worked in money advice, or who has gone through the process, can tell you, getting out of debt and learning to live on a tight budget can be a long and exhausting process. It will mean limiting expenditure on all but the bare necessities, going without holidays, new clothes, treats, and in one case I know of, postponing extending your family.
The Credit Union Alternative
I am often asked why Credit Unions don’t provide an alternative in the payday loan market. The simple answer to that is cost. Credit Union loan rates are capped at 42.6% (and before you go WHAT?? That is roughly £10 on £300 borrowed over fourteen days) and while we are not in the business of extorting money on those figures we would make a loss which we are not allowed to do.
But the real reason Credit Unions don’t operate in the payday lending market is that we know that there is never a ‘quick fix’ when it comes to money but rather we work with our members to enable them to save and borrow within a manageable budget, building up a relationship of trust and mutuality that ensures that we all, savers and borrowers, flourish together.