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In this occasional series, Iona comments on what’s in the news and what it means for you. This week, Wonga is slammed for suggesting payday loans are suitable for students
A few months back, I wrote about the dangers of easy-to-access payday loans. You may have seen the alluring adverts on TV for companies offering instant cash without any credit checks. What you don’t realise straight away is how high the interest rates are – 4000% being pretty normal – and how easy it is to be sucked into debt if you don’t keep up your repayments. Shelter has become the latest organisation to warn that people who use payday loans to cover their rent could be on a slippery slope towards eviction and poverty.
When I wrote the blog, my biggest concern was the assiduous targeting of young people through clever mobile apps – Ferratum was, in my eyes, the worst culprit for trying to lure young people into an unwise financial practice.
But this is nothing compared to the latest tactics of Wonga.
It has been trying to convince students that payday loans are a way to get through your university degree and are, in fact, better than student loans. No, I’m not kidding.
This has spectacularly backfired. Financial experts, consumer champions and students have been in uproar, with the word ‘Wonga’ briefly becoming a top trend on Twitter. The National Union of Students (NUS) called the company “incredibly irresponsible” and Wonga has now taken down the page that caused all the fuss.
Little wonder – it was called “Payday loans: an alternative to Education Loans”.
In the article, Wonga admits that interest rates for its payday loans are “much higher” but that students only borrow them for a month and “pay back the interest on a date that suits”.
The badly judged and irresponsible advert – and it’s nothing more, nothing less –masquerades as a guide to student finances, yet it disparages student loans, makes no mention of hardship funds that offer loans for low or no interest rates and tries to convince us that payday loans would reduce the amount of debt owed by a student in the short term.
It tried to cultivate an air of credibility by advising students how to manage their budgets, then trashed it by suggesting that a payday loan could be used “if your mates tell you about finding a deal on plane tickets to the Canary Island”.
Who were they kidding?
A Wonga statement said that the page was not designed to target students and was an old article purely there for SEO purposes. I’d think anybody working in the Search Engine Optimisation field would feel ashamed that this was done in their name just to bring a few more readers to a crummy website.
He also maintained that those at university make up a tiny percentage of their customers. If that’s true, I hope it’s because young people have far more sense than to take out loans with a typical APR of 4, 214%.
Let’s suppose that a student, accepted for a loan on the basis that he will have a “payday” through a job, borrows £400 over the maximum 33 day period. He or she would have to pay £137.48 in interest and fees.
Students must be confident they can repay the entire debt – in this instance, £537.48 – within the month without any trouble, otherwise the debt will be rolled over into the next month, meaning more interest to pay back.
Even those who are sympathetic to payday loans –normally those associated with selling or marketing them –agree that they shouldn’t be take out more than three times a year. Did the student“guide” ever explain this? No.
It is beyond foolish for any student to entertain payday loans when student bank accounts offer overdrafts, which can always be extended and with much lower costs than payday loans even if you go beyond your agreed limit. Find out more in my guide to student accounts here.
Above all, I urge students who are struggling with their finances to talk to family or friends and consult a free debt advice service or their Citizens Advice Bureau. Here are a couple of useful numbers: the Consumer Credit Counselling Service – 0800 138 1111 and the National Debtline -0808 808 4000.