Two Wonga's Don't Make A Right...
A common perception - pay day loan companies lend to borrowers not welcome by the mainstream banks. Since the banking collapse and tougher access to credit, the business of pay day lending has expanded rapidly.
There is support for and against this form of short term lending. Critics claim they are legalised loan sharks, preying on the desperate and vulnerable in society. On the other hand, supporters say if they did not exist, borrowers would approach "real" loan sharks. Never mind having sleepless nights from your debt - you could end up "sleeping with the fishes".
So the big fish, Wonga, has schmoozed the Financial Conduct Authority (FCA) and through a voluntary agreement unveiled it is writing off £220m of debt for 330,000 customers.
Basically, we at the GDP Equity Experts Team have always said debt is an affordability issue. After putting in place new affordability checks, Wonga are advising that existing customers in arrears whose loans should not have been made in the first place, will have the debt written off.
We welcome this news, it is the right thing to do, but it is hardly surprising then that as a result of poor affordability checks in the first place that we are talking about 330,000 people affected and £220m of unaffordable debt in the system.
After recently highlighted malpractice, Wonga has identified the need for change. Wonga currently provides lending services to about one million customers a year, and along with the wider payday loan industry, this type of lender continues to attract controversy.
Don't get me wrong, this industry is no different than their mainstream counterparts. The banks are also going through a period of change, to right things that should not have been wrong, in the first place. They will all now implement stricter lending criteria that should limit reckless lending and in turn limit debt default.
Ultimately this all means further limiting access to credit. It is the lack of credit that is restricting business investment and ultimately growth in the wider economy. Until such times that the mainstream banks are back lending across all sectors again, private investors will have to continue to fund this gap.
We also welcome the reaction by the Director of Supervision at the FCA, Clive Adamson. In a statement he advised, "This should put the rest of the industry on notice, they need to lend affordably and responsibly."
Businesses and people will always need to borrow money, but it must be conducted responsibly and in such a way that it is affordable and reasonable. The information gap between bank and borrower is narrowing and as we all become more financially aware, this relationship will become much fairer too.
The bottom line is this: all borrowers and lenders need to deal amicably and realistically with their existing debts. Borrowers who can afford to should pay, and in return banks should write off debt for those who can't. If agreements cannot be mediated... these two wrongs don't make a right.