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The Young Money Blog investigates a controversial new initiative from Wonga that could seriously test your friendship…
Imagine this scenario. You’ve logged on to Facebook. You want to find out what time the party is on Saturday, or how many birthdays you’ve forgotten about today. You might find out whether that on-off-on-off couple you know have finally decided to get married or embark on various drunken relationships that you will probably witness in all their unfolding horror through photo galleries in the months to come.
In other words, another day in the life of the Facebook generation. But hang on – one of your friends has sent you a message. He/she wants you to borrow from a payday lender called Wonga. They tell you they had a marvellous experience, borrowing money quickly and easily, and want to recommend the payday lender to all their friends, particularly since you can get £5.50 off the first loan by using a special ‘promo code’.
So you take the bait. You borrow the maximum amount – £400 – to go to that music festival or book that holiday that seemed financially out of reach. That is what Wonga wants you to do because even if you don’t have the cash, to quote those famous L’Oreal babes, you really are worth it.
But what if you subsequently read that borrowing £400 from Wonga would cost you 20 times the interest of a standard credit card? More importantly, what if you realised your friend had actually been paid £20 to persuade you to become a customer?
This dilemma is a real possibility for anyone who has been welcomed into the Wonga family through its little known “refer-a-friend” scheme.
Readers of this blog who aren’t Scottish may have missed my scoop for the Glasgow Herald at the weekend, where I revealed that Wonga is paying customers up to £100 to sell its loans to their friends on Facebook, despite charging more than 20 times the interest of a standard credit card.
Existing customers will receive £20 if they persuade a friend on Facebook to use a discount code on their first loan with Wonga, which will exempt them from a transaction fee of £5.50.
As long as they have used Wonga before, Facebook users can recommend the firm, which charges 4214% APR, to five friends, earning £20 each time. Several sites have now sprung up to offer promo codes when people type “Wonga” into their search engines.
So I asked the Debt Support Trust to examine what it would cost to borrow relatively small amounts of cash in the short-term from various sources.
The answers were illuminating, to say the least. Borrowing £400 a month from Wonga would cost £119.98 in interest, compared to just £5.88 on a Barclaycard credit card and £30 on an authorised overdraft from Bank of Scotland.
Even those with a bad credit rating would only pay £10.61 if they withdrew the cash on a Barclaycard charging 29.9%.
Wonga has also frequently claimed that its loans are cheaper than going into an unauthorised bank overdraft. However, it would cost half the amount to borrow £100 over 20 days on an authorised overdraft from Royal Bank of Scotland.
Wonga promises to put cash in people’s accounts within 15 minutes, but the alternatives can offer the same amount on the same day, if not instantly from a cash machine.
Chief executive Errol Damelin has frequently said the firm is aimed at tech-savvy young professionals who want extra cash to fund holidays and trips to music festivals.
But the firm recently removed a page on its website that promoted payday loans as an alternative to student loans after the National Union of Students deemed it “predatory”.
The Office of Fair Trading is currently investigating 50 major payday lenders over concerns the industry is targeting financially vulnerable people. Wonga says it avoids this danger by accepting only 30% of applications for loans.
Wonga also sponsors Hearts, this year’s Scottish Cup Finalists, and has been quick to tell Facebook users this week that it’s “very excited” for an all-Edinburgh final.
But English football fans began a campaign last month to remove Wonga advertisements from the websites of clubs, calling for the promotion of credit unions instead.
Research from Debt Support Trust shows Wonga would be 13 times more expensive than borrowing £400 from two typical credit unions, London Mutual and Hi Scot Credit Union, which would cost £8.81 over a month.
I spoke to Rod Ashley, chief executive of the Scotwest Credit Union, who said that credit unions don’t have huge advertising resources, like Wonga, and struggle to get through to young people as a result.
“Credit unions are increasingly changing their image – it isn’t necessarily a long-term process anymore, and loans don’t have to be for emergencies. Although you would still have to join, a loan could be discussed and agreed within a day, and what’s more, the credit union can charge fairly.”
Most importantly, credit unions will quickly try and encourage young customers to get into the savings habit, so next time you need an injection of cash, you can access their own pot of money rather than resort to Wonga and its ilk.
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