In its 2012 report, however, Errol Damelin, Wonga founder, says his firm is lending responsibly to people who can afford to pay back their loans quickly.
Surge in customers
In 2012, Wonga handed out 3.8million loans – a 1.4million increase on 2011, and equal to more than 10,000 loans a day.
In total, it lent £1.16billion in 2012, which is £453million more than the year before. It also increased its customer base to around 1million cash-strapped borrowers.
All of this earned the lender profits of £84.5million before tax (£62.5million net).
Citizens Advice said payday lenders should focus less on profits and more on treating customers fairly. Gillian Guy, chief executive, said: “Payday lenders' profits come directly from the pockets of consumers, many of whom turn to them out of desperation rather than choice.
“The payday loans industry must focus on boosting customer welfare, rather than boosting profits at the expense of hard-pressed householders who struggle to pay back unaffordable loans.”
Stella Creasy MP, a long-time anti-payday loan campaigner, said money made in the industry “comes at a heavy cost to our country”.
She added: “Not everyone who borrows from these firms gets into financial trouble, but enough do as a result of the terms of the loan that such mega profits are achievable even in times of economic difficulty.”
Wonga says its profits equate to a net profit of around £15 per loan and attributed its 2012 growth to a “continuing need for short-term borrowing”.
It also says that the annual APR of its loans doesn’t reflect the true cost to the customer, as most loans are repaid over shorter terms. The example quoted on its home page is for a loan of £150 for 18 days, with interest charged at 365% and equating to £27.99. Once the ‘transmission fee’ of £5.50 is included, the total repayment reaches £183.49, giving the representative 5853% APR.
The entire payday loan lending industry was referred to the Competition Commission by the Office of Fair Trading at the end of June, which cited “deep-rooted problems” with the way competition works, resulting in it being difficult for consumers to identify or compare the full cost of payday loans.
It also said a significant proportion of borrowers have poor credit histories and limited access to other forms of credit.
Wonga says it rejects two-thirds of its applicants and welcomes the opportunity to work with the Competition Commission to “build a short-term credit sector based on our values of responsible lending and putting customers first.”
In July, Justin Welby, the Archbishop Canterbury, said the Church of England plans to “compete Wonga out of business” by expanding credit unions as an alternative to payday lenders.
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