One of the biggest companies in the personal payday loan and short-term loan market, Wonga, has announced that they are entering what is known as voluntary administration. This means that they are no longer accepting new applications for their loans and their management is changing with immediate effect.
Wonga are unable to pay back their own debts and, as a result of this, they have to stop their lending activities temporarily while both administrators and the Financial Conduct Authority decide the company’s future. With Wonga’s future so uncertain, what does that mean for borrowers who are hoping to lend from Wonga? And more importantly, what does that mean for those who already have loaned out with them?
This news comes after Wonga received a £10 million cash injection from shareholders in an attempt to keep the company afloat. The reason Wonga needed such a large sum of money is that there has been a recent influx of claims made against them before the Financial Conduct Authority’s guidelines were introduced.
These claims against Wonga have been made by people who had taken out loans before 2014. At this time, there was a lot of negative press coverage in which Wonga was accused of pressuring people to take out loans and providing people with loans at unfairly high levels of interest. Furthermore, there have been a large number of people coming forward saying that Wonga’s credit checks weren’t thorough enough and that they could not afford to pay off their loans, making them spiral even further into debt.
Wonga’s previous losses
The FCA forced Wonga to pay out over £2.6 million to around 45,000 customers who correctly claimed that Wonga sent them threatening letters pretending to be a non-existent law firm cashing people who had missed payments.
Later that year, Wonga was forced to wipe out a further £220 million in debts and interest from 375,000 borrowers. This was because the company had admitted that they hadn’t performed adequate credit checks when they were approving applications.
All lenders are required to perform credit checks when they are approving applications. If they don’t, they might approve a loan for somebody who cannot afford to pay it back and this will potentially make them go even further into debt to pay off their initial loan.
In 2015, Wonga announced that they had finished the year making a loss of £80 million. 2016 wasn’t any kinder to the loan giant either with annual losses amounting to £65 million. Towards the end of 2016, Wonga experienced a major security breach, during which, 245,000 customers’ information was stolen.
The main factor in Wonga’s downfall however was the introduction of the FCA guidelines in 2015, financial commentators claim
Wonga’s issues with the Financial Conduct Authority
In 2015, the Financial Conduct Authority imposed strict new guidelines on personal loan providers like Wonga. These new guidelines were designed to keep customers safe from lenders and to make sure that loan providers were not taking advantage of borrowers.
The guidelines included a 0.8% daily interest rate cap, a maximum penalty fee of £15, and the guarantee that borrowers would never pay back more in interest and charges than the size of their original loan. This was a huge blow to Wonga because they had been previously charging interest rates of up to 5,853%. Now their highest APR on a loan is 1,509%.
This history of poor behavior from Wonga meant that there were a lot of claims that have been made against them. Each claim that has been made against Wonga (regardless of whether or not it was upheld) costs the company £550 in administration fees.
What will happen to Wonga’s existing customers?
Because Wonga has entered into voluntary administration due to their unmanageable debts, the company has confirmed they will no longer accept new applications for credit.
Wonga issued a statement saying that “customers can continue to use Wonga services to manage their existing loans but the UK business will not be accepting any new loan applications.”
It will be decided over the coming weeks whether the lender will be able to continue offering loans in the future. It is still possible that Wonga may choose to raise additional funds by selling any uncleared debts to a third party, but this is yet to be confirmed.
For now, those that already have a loan through Wonga will still be required to make their repayments as agreed. The FCA has stated they will be overseeing Wonga during this time to ensure existing customers are treated fairly.
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Disclaimer- Please note that We are not an affiliate site for Wonga. This is purely our financial experts’ view.