In August 2018, Wonga, the leading payday loan lender in the UK, literally ran out of “wonga”. In any line of business, the collapse of the leading payer causes major disruption and ripples. And, coming up to three months after Wonga entering administration, other payday and short-term loan lenders are in the firing line.

The reason Wonga went under is probably not the reason you think it might be. In this article, the BestUnsecuredLoans team explain:

Short-term, high-cost credit – the marketplace
The big changes to the market in 2016
Borrowers complain in big numbers against Wonga
Complaints against payday lenders rise
Using a broker to find the right payday loan solution for you

Short-term, high-cost credit – the marketplace

In 2006, the number of people taking out payday loans in the UK was small. They were generally only available from specialist high-street outlets and pawnbrokers. They were know at the time as “cheque cashers”.

The way it worked was that you’d write yourself a cheque for the amount you needed – you’d get the money in cash straight away. Then the cheque casher would write a cheque for the amount you’d borrowed plus a fee and this cheque would then be cashed on your next pay day.

Dial forward a few years and millions of Brits had little mini-computers they carried around with them called “smartphones”. Wonga were among the first to marry together the computing power in your pocket and a very complex algorithm designed to measure how likely someone would be to pay back a loan borrowed over up to 30 days. A decision could be made almost instantly and within an hour, the money would appear in your account.

For the generations which grew up before the smartphone, this was a revolution. For everyone else, this became the new and easy way to borrow money. The loans were expensive but they were convenient for borrowers who needed cash short-term to cover an emergency.

For years, newspapers and news websites were full of stories about the level of interest charged by payday lenders together with stories on how they behaved towards borrowers who fell into arrears.

The Government felt that it was time for a change.

The big changes to the market in 2016

Although all lenders previously had to be awarded a licence from the Financial Conduct Authority, from 2016, tough new qualification tests were put into place for companies wanting to continue making payday loans.

Payday lenders would now have to follow five golden rules:

1. Interest must be capped at 0.8% per day (that’s 80p for every £100 borrowed)
2. If a borrower defaults, they can’t be charged more than £15
3. If a payday lender tries to collect money twice without success from a borrower’s bank account, they can’t make any further attempts without the permission of the borrower
4. If a borrower’s loan becomes unaffordable, a payday lender must point them in the direction of a charity which can appoint someone to represent the borrower in negotiations to pay the loan back
5. The total amount a borrower pays for their loan in interest and charges must not be more than the amount of money they borrowed in the first place

Compared with what went before, these were difficult for most payday loan companies to comply with. As a result, many of them dropped out of the market.

Borrowers complain in big numbers against Wonga

By this time, claims management firms and solicitors’ practices started to encourage payday loan borrowers to complain against Wonga and other firms. Complaints were made if the borrower felt that proper affordability checks hadn’t been carried out either when the first loan was applied for or on subsequent loans.

Borrowers would first write to Wonga and if Wonga’s reply was unsatisfactory, they would then complain to the Financial Ombudsman Service.

What actually caused Wonga’s collapse is that so many people complained to the Ombudsman. For each complaint, Wonga had to pay a £550 case management fee. This £550 was the fee even before any compensation to the borrower was calculated and paid for. In the end, the number of £550 charges proved too much for them, despite an emergency cash injection of £10m in early August to help them financially cope with the fees.

Complaints against payday lenders rise

Despite the new rules being enforced on payday lenders from 2016, complaints about payday lenders have continued to rise – by 80% in the first six months of the year.

Even though the industry is far better behaved than ever before, borrowers now feel much more empowered to make complaints when they feel they have been unfairly treated.

Using a broker to find the right payday loan solution for you

This can only be a good thing we believe here at BestShortTermLoans. For us, the behaviour of the payday loan providers we work with is vital – we’re here to help people, not to make their lives more difficult.

The more the customers complain, the better payday loan companies will understand what they’re doing right and what they’re doing wrong. Whatever the line of business, things work better when customers and companies respect each other and understand what’s important.

We have a great panel of payday loan providers here at BestShortTermLoans. We’re a broker – we’re not a lender. What that means is that we do all the hard work matching you and your financial circumstances up to the borrowers who want to lend money to you.

It’s because we know our customers and our lenders so well that we’re able to partner you up so perfectly. That means the best and cheapest deal for you – a loan that fits around your life and not the other way around.

Here’s how we do it. Fill in the form on our website. Give us the details we need – where you live, how much you earn, who you work for, how much you spend and on what each month – and our clever computer system finds instant matches for you based upon what you’ve told us. We then run just one credit check on you and send it to all of the lenders who’ve come back to us with an offer

You’ll then see, in full detail, all the final offers we’ve found you. In some cases, a lender may want more information and this may affect the rate of interest you pay or whether a loan is offered at all.

If you see a loan that you’re happy with, simply sign the online paperwork and the money should be with you within an hour or two (depending on your bank). If you don’t see a loan you like, don’t worry – there’s no obligation on you to take out any loan offered.

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