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Hongga's choice to amortize 220 million pounds in debts for 330,000 clients and "voluntarily" adopt new rules is seen by many as a way of achieving greater fairness and an apparent failure for the big, poor, payday-lending mincer. Unfortunately, the Financial Conduct Authority's attempts to further tighten the regulation of the payday credit industry may result in damage to low-income borrowers.
However, first we need to differentiate between the payday banking sector and Wonga as a particular organisation within that sector. Payment day creditors provide their clients with fast and simple means of accessing short-term liquidity. Although anyone with any level of earnings could request a Wonga mortgage from Wonga, it is mainly used by low-income individuals, as such merchants are struggling to get loans from banks and major payment card companies, and payday loans are often less expensive than using an unauthorised overshoot.
There are of course inherent downside exposures to payday borrowing, as "companies outsource to high-risk demographic information that is usually low in earnings and creditworthiness. "To remain viable and avoid insolvency, payday loan institutions must include default losses in their interest rate. Such interest rate-especially Wonga's rates-are usually the object of a myth created by payday loan adversaries who either unintentionally or deliberately poorly analyse the information.
Above all, Wonga is being attacked by criticism because he has charged his clients an astronomical interest of 6,000%. Hongga's payday interest on loans is limited to sixty dates, so there is no single case where someone could pay almost 6,000 APR to Wonga, as the firm is compelled to pay itself an AAR.
Several of the points of criticism specifically expressed against Wonga have credit - in fact, their falsified juridical mail campaign last summers - which threatens clients with taking remedial measures if loans are not paid back - made everyone feel uneasy with the sector. However, the FCA's ruling to take steps against all payday creditors as a consequence of Wonga's acts will force almost all payday creditors out of business and abandon Wonga to rule the game.
Since today, it has implemented new credit standards to help it make better choices. This means that it will grant loans to fewer individuals, and it is unlikely that it will be the only company that will be obliged to do so, as the EZV said today: "That should make the whole business sit up and take notice. Really? These new credit granting requirements, combined with the strengthening of existing rules - a ban on payday publicity in places of general interest - and the rules that will be put forward in the near term - such as a binding cost ceiling for all short-term loans - will reduce the viability of the whole sector and force smaller firms that would otherwise be competing with Wonga out of the martin.
In addition, other forms of indirectly regulated finance maintain Wonga's dominant position in the lending area. Co-operative banks could become viable payday financiers and competes with businesses like Wonga, but their interest rate ceiling of 3% per months keeps them from correctly compelling the markets. Yes, Wonga is faced with a 53% decline in net income, partially as a consequence of new checks by the FCA, but other payday lending firms that do not have the ethical dubious Wonga story want to be taken out of the open together.
Critics of payday loans will be thrilled to learn that the payday loans business is on the rock, but those who actually use their facilities and profit from the loans should be concerned. Banking and financial service providers have rated these clients out of access to loans, and with fewer payday creditors providing their service to low-income individuals, many will find themselves with no option, no loans and no way to repay rental.
Whilst payday creditors are far from being the ideal system to provide loans to low earning clients, they are currently the only viable way for such individuals to get their hands on necessary loans.