Household debt in the UK is increasing and high-cost credit is a serious issue. A report in The Guardian last year showed that household debt has increased by 7 per cent in the past five years. Council tax arrears are up 12 per cent and unpaid water bills are up 17 per cent over the same period. Wages have barely increased during that time. A mix of poor wage growth, government cutbacks on welfare and public services, and the uncertainty created by Brexit have forced millions of households to borrow to buy essentials. This reality lead to a very quick rise and fall of payday lender Wonga.
The squeeze on low-income households has driven the payday loans market. While there have been improvements in the regulation of payday lenders, predatory lending still goes on and it’s the poorest in society who are most affected. People in poverty pay more for their essential services, just as they pay more for credit. Small loans can quickly spiral out of control. Interest rates on payday loans have been capped by government, but can still reach 1,509%.
Now, is the collapse of Wonga really good thing? Let’s take a look…
Who are Wonga?
Founded in 2006, Payday loan company Wonga set out to offer short-term loans to its customers at high interest rates. Wonga described its concept as a convenient service for internet-savvy consumers, with loans being authorised quickly on smartphones and delivered to bank accounts in minutes.
Wonga is perhaps the most well-known payday loan company. It is famed for its controversial adverts, extortionate interest rates and reckless lending. In 2014 Wonga was ordered to pay £2.6 million in compensation for unfair and misleading debt collection practices. In July 2014, the Financial Conduct Authority announced plans to cap fees charged by payday lenders. Beset by several scandals, Wonga tipped into collapse following a surge in customer compensation claims.
How does household debt affect UK society?
According to The Money Charity, the Citizen’s Advice Bureau in England and Wales dealt with 2,397 new debt problems every day in August 2018. The Money Advice Service have reported that there are now 8.3 million people in the UK with problem debts. Now, what effect does this have on society? With a quarter of the UK’s poorest households getting deeper in debt, we have to consider the kind of society we have become. The age of austerity appears to be punishing the poorest and the most vulnerable. Payday lenders prey on the desperation of the poorest.
A report by Citizens Advice, A debt effect?, explores the relationship between unmanageable debt and wider problems in people’s lives. Unmanageable debt has been shown to be connected to financial exclusion, family breakdown and poor physical and mental health. The report suggests that debt both contributes to and is a product of poor mental health. Debt has a harmful effect on personal relationships and contributes to family breakdown. And indebtedness amongst unemployed people can serve as a disincentive to work. Where is the incentive if earnings are taken up in debts and interest?
Who uses Payday loans?
According to the Institute of Fiscal Studies (IFS), being in arrears on debts or other payment obligations is highly concentrated amongst the lowest income households. The people most likely to take out a payday loan are those without any other access to credit and least likely to be able to repay, sparking a downward spiral of debt.
What are the alternatives to payday loans?
Many people take out a payday loan when they are in a desperate situation. For people with a poor credit rating it can seem like the only option, but there are other more cost-effective loan alternatives. Guarantor loans, for example, are much more affordable loan for those with a poor credit history than payday loans. The biggest problem for people who are more likely to be drawn in by payday loans is the lack of access to good advice.
Why payday loans are bad…
Payday loans aren’t just bad for those stuck in a cycle of poverty and increasing debt, they are bad for the collective good of our economy and society. People servicing debt aren’t spending as much money on other things. The overall economy is affected. There is also the issue of mental health and debt and the cost of that to society in the form of healthcare and in people’s ability to work and contribute to the tax system.
According to a recent report in The Guardian, there is a picture of rising inequality in the UK. The International Monetary Fund, who specialise in rescuing troubled economies, recognises that some inequality is inevitable in a market-based economic system, but also that excessive inequality can erode social cohesion.
With all this said, is Wonga’s collapse really a good thing for the UK?
The collapse of Wonga is only a good thing if other payday loan companies don’t fill their shoes. Speaking to iNews about Wonga’s collapse, Nick Butler, a visiting professor at King’s College London, and former senior policy adviser to Gordon Brown, says that Wonga’s collapse could push people towards loan sharks. “I don’t love Wonga but I am afraid many people will fall out of desperation into the hands of money lenders who operate outside of the law.”
Actor Michael Sheen has scaled back his acting career to campaign against high-interest credit providers. He says “We share a moral responsibility to help protect vulnerable customers from the harm high-cost credit causes. The evidence on the impact on our health and well-being is now overwhelming. We have the evidence. Now we need action.”