One of the UK’s leading payday lenders, Wonga, has revealed that they are no longer processing new loan applications.Instead, the firm is entering voluntary administration.
Wonga announced their move to stop accepting new loan applications amid reports that they were running out of operating cash because of the pressure put on it caused by the number of claims made against it for compensation. Because of this, an independent administrator will now take over the running of the payday lender.
The next couple of weeks will reveal the fate of Wonga as a decision will need to be made about whether the troubled firm will continue operating.
The last couple of years has seen Wonga experience a rapid decline in both its reputation and profit. Three weeks ago, the company received a cash injection of £10 million from shareholders to help them continue to trade. However, commentators now believe that the payday lender cannot be saved.
The large investment by shareholders was made after Wonga saw a surge in compensation claims from customers who had taken out a loan before the company adopted the FCA’s tougher guidelines.
Just before 2014, many were critical of Wonga’s high interest rates as well as their marketing tactics. Politicians and debt charities claimed that the company strategically targeted borrowers who were the most vulnerable. It has now been confirmed that most of the new compensation claims are for loans that had been taken out in this time period.
Wonga’s recent losses
In 2014, Wonga was ordered to pay out over £2.6 million to 45,000 customers who received “menacing” letter from fake law firms chasing overdue debts.
That year was arguably the beginning of the end for Wonga. They were left with no other option but to write off £220 million in debts after admitting that these customers shouldn’t have been accepted for credit in the first place.
The following year, the payday lender announced losses over £80 million. Over the course of the year, Wonga attempted to reduce their overall debt load but they made another loss averaging at nearly £65 million.
Wonga was hopeful that they could make a profit in 2017 but a large security breach stopped them interrupted their sluggish progress in achieving that target. This security breach saw cybercriminals steal data from over 245,000 Wonga customers in the UK and helped to damage the payday lenders already tainted reputation.
Combined, these eventsdamaged Wonga’s ability to make profit however incorporating the FCA’s price caps arguably damaged the firm’s money-making potential the most.
The Financial Conduct Authority meets Wonga
In 2015, The Financial Conduct Authority (FCA) announced a new set of strict rules that short-term, high-interest loan providers had to abide by including price caps on interest rates and additional fees.
The new rules by the FCA meant that lenders couldn’t charge any more than 0.8% a dayin interest on the amount of money advanced to a borrower. Another rule introduced at the same time saw additional charges capped to £15 maximum.
Lenders also couldn’t ask their customers to repay more than 100% of the total amount of money borrowed. So, if a customer takes out a loan for £100, the most that their loan provider could charge them would be £200.
Before thenew rules were adopted, Wonga had previously relied on high interest rates of more than 5,853% APR to make the firm profitable.
However, after the rule change, the payday lender charged a much-reduced interest rate of 1,509% – this is equivalent to £16.80 in interest for a loan of £150 over a fortnight. This caused a significant loss in revenue and the possible profit per loan was greatly reduced.
Lately, Wonga’s profits have suffered a significant hit with administration fees related to each claim made again it by past customers. On average, the company pays out £550 per claim in processing charges.
What happens to Wonga’s current customers?
Now that Wonga has entered administration, the question on many customers’ minds will be “what happens to us?”
Although Wonga isn’t accepting any new customers, borrowers who have already taken out a loan and are currently in the process of repaying need to continue with their payment schedule. This is because administrators are currently running the company and this means that the collections team at Wonga is operating as normal.
The FCA are currently monitoring the situation to ensure that Wonga’s customers are treated fairly.
Although people looking to take out a loan are currently unable to with Wonga, this could change in the future. There is still a small chance that Wonga will partially recover from its current predicament and return to providing loans.
The payday lender could potentially do this by selling uncleared debts to third parties in a bid to raise the necessary funds.
Do you need a reliable loan broker?
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Disclaimer- Please note that We are not an affiliate site for Wonga. This is purely our financial experts’ view.