Citizens Advice joins with Wonga
Filed under: Loans
The unlikely partnership has sparked criticism yet both groups claim the goal is to help consumers by discovering more about our borrowing habits.
The joint initiative is between Wonga and the Citizen's Advice bureau in Medway - home to over 250,000 people in south-east England. The venture involves the high-profile lender providing technological support and paying for Citizens Advice employees in the Medway area of Kent to be trained to question between 6,000 and 10,000 people about their employment, income status and debts.
Medway has been identified as an area affected by high levels of personal debt and by social and economic deprivation. CAB figures reveal that the average unsecured personal debt in the area now stands at £43,000. The Medway bureau deals with £2.5m worth of personal debt stories every week and has even recently met a client with 68 credit cards.
The research findings will be used to better understand the personal finance issues facing local people, make recommendations to other bodies and help to introduce financial awareness support to the area.
Dan McDonald, Medway CAB CEO, said: "On the surface this may seem an unusual partnership, bearing in mind that Medway CAB has been at the forefront of the campaign to highlight the risks associated with payday loan lenders.
"However, our knowledge and experience leads us to believe that there is a great deal more work needed to understand the issues and the challenges associated with the costs of day-to-day living. I have had a number of open and frank discussions with Wonga and have been impressed by their commitment to this independent inquiry."
The partnership is indeed surprising in light of the debate about the unscrupulous business practises of some payday lenders and the extortionate rates of interest charged to vulnerable consumers. The Consumer Credit Counselling Service (CCCS) reports that some of the better known payday loan companies charge interest rates of over 2,500% APR.
While lenders argue that the APR (annual percentage rate) is misrepresentative of the true cost to borrowers, because loans are taken out for a much shorter term than a year, there is no denying that payday loans are an expensive way to borrow.
A recent survey from Which? found that over 60% of people who took out payday loans were using the money to pay for household bills or other essentials like food, nappies and petrol. While the sales pitch of the loans is to help people with short-term financial needs until payday, the research shows people often become trapped in a downward spiral of debt caught by exorbitant penalty charges of up to £150 because they cannot afford to pay back the loan on time.
Which? executive director Richard Lloyd said: "With 1.2 million people taking out a payday loan last year, it is unacceptable for this rapidly growing number of people to be inadequately protected from extortionate charges and dodgy marketing techniques.
"At its worst, this booming £2billion industry can be seriously bad news for borrowers who are struggling to afford food or pay their bills. People are getting caught up in a debt trap, whacked with high penalty charges, or encouraged to roll over payments and take out more loans at inflated rates."
Is Wonga different?
This new initiative appears to be an effort by Wonga to repair its reputation and set itself apart from other payday lenders. A spokesperson confirmed that the lender supports the CAB nationally and the CCCS, as well as working with the Money Advice Trust.
Henry Raine, head of regulatory and public affairs at Wonga, said: "We have worked with Dan and the Medway team for some time and we also support a number of other debt charities.
"We are a transparent lender and we regularly survey our own customers to understand their concerns and improve our service. We very much welcome this initiative to focus on the experiences of borrowers, some of whom will be our customers, in a thoughtful way across the Medway area"