Wonga pushes up typical APR to 5,853 per cent – but says that borrowers will pay less for payday loans
The typical annual interest rate that Wonga charges for loans has jumped from 4,214 per cent to 5,853 per cent, but the payday lender has claimed it is a sign borrowers are paying less.
Wonga has adjusted the representative APR on its loans. This is the interest rate that companies providing credit must display to give an indication of the cost to borrowers if they held a debt for a year. The figure factors in any additional fees and charges that come with the loan in addition to the interest paid.
The whopping increase in Wonga’s already astronomical APR is down to average loan period falling. The company said that the period of time that borrowers are taking to repay its loans has fallen from an average of 30 days to 15.
How much? Wonga has pushed up its typical APR to 5853 per cent but it says that customer’s will pay less.
It says that because it charges 1 per cent simple interest per day, plus a £5.50 cash transmission fee for loans that are usually taken for less than 20 days, the cost of these loans has not fallen in line with the length of the loan. The effect is to push the APR higher.
WHAT IS APR?
The Annual Percentage Rate is how much your borrowing will cost over the period of a year.
It is calculated using a standard method by call credit providers, using an assumed level of borrowing of £1,200.
For example, if you had a loan with an APR of 8 per cent, this would mean that for each year that the loan was outstanding, 8 per cent of the amount borrowed would be added to the total amount you would have to repay.
Wonga has long argued that APR is inappropriate as a tool for comparing payday loan costs with other forms of credit on the grounds that borrowers hold the loan for only short periods.
It says that customer’s will never pay thousands of per cent in APR because if they are unable to repay it sets up a ‘sensible repayment plan’ and after 60 days it will freeze balances on loans.
Instead it thinks that short-term loans should be measured in pounds and pence, so customer’s can compare this way before applying.
Explaining on its blog, Wonga said: ‘People only pay for the time they need the cash and a typical loan example of 15 days would come with 15 per cent interest. But while shorter Wonga loans cost less in real terms for our customers, this trend means a bigger Representative APR. It’s crazy but true.
‘This is just another example of why not only we, but the Public Accounts Committee, a cross-party group of MPs, think the APR rules are “outdated and misleading” when it comes to short term credit.’
Backtrack: Wonga today also dropped an appeal against action taken by the Office of Fair Trading over some of its debt collection practices.
Meanwhile, Wonga today backed down from a fight with the Office of Fair Trading on measures to improve its debt collection practices.
The payday lender was told to change the way it recovers debts by the OFT last year but it decided to appeal the decision.
OFT TO DECIDE ON PAYDAY PROBE
The Office of Fair Trading will announce next Thursday whether it plans to refer payday lenders for a full-blown investigation by the Competition Commission.
The Office of Fair Trading (OFT) previously uncovered evidence of ‘widespread irresponsible lending’ and gave the 50 biggest players in the market a 12-week deadline to prove they were up to scratch or risk being put out of business.
The watchdog published a damning report into the sector in March, and said at the time that it was minded to refer the industry to the Commission, which has strong powers to ban or limit products and shake up whole markets.
It told This is Money today that it would making an announcement next Thursday on its decsion to refer the industry.
Last year the OFT found Wonga had been wrongly accusing some customers of committing fraud and threatened with them with police action.
The accusations were made in letters sent in 2010 to customers who had claimed money back from the payday lender by asking their card providers to reverse a payment made to the company.
Wonga staff also told some customers who worked in the public or financial sectors that they had to pay, or else would break terms in the contract of employment.
Wonga then decided appeal the decision because it said they were isolated incidents and the letters and scripts for phone calls were no longer in use.
A spokesman from Wonga today said that it has dropped the appeal because it wanted to focus on implementing the most recent requirements of the OFT industry review.
Earlier this year the OFT sent letters to 50 of the UK’s biggest payday lenders asking them to radically improve their business practices.
Payday lenders are designed to provide a stop gap for those struggling before the wage installment – but they often come with extremely high rates of interest. For example, Wonga charges a representative APR of 5853 per cent.
Since launching a warning to the industry the OFT has been consulting on whether to refer it to the Competition Commission – it is set to make an announcement on Thursday next week.
Confusing: A clip from a video Wonga has posted on YouTube to explain why it has put up its typical APR.
David Fisher, senior director of consumer credit at the OFT, said: ‘We imposed this requirement to make sure Wonga does not use certain debt collection practices it previously used. We welcome Wonga’s decision to withdraw its appeal.’
A spokesman from Wonga said: ‘Regulation and compliance are extremely important to us, so we have decided to focus our resources on the requirements of the current OFT industry review, rather than on an appeal about some isolated collections communications from over three years ago.
‘Our collections team is sensitive to the needs of customers in genuine difficulty, while we also continue to keep bad debt at industry-leading lows.’
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