Wonga agreement raises issue of debt responsibility

October 3, 2014
4 min read

Wonga, the payday loan market leader, has announced that it will be writing off the outstanding debt of 330,000 customers who are in arrears of 30 days or more. This totals £220 million. Meanwhile, another 45,000 customers who are in arrears of up to 29 days are to have the interest and charges on their loans scrapped.

Acknowledgement of responsibility

The move is an acknowledgement that Wonga’s lending practices had allowed some consumers to obtain loans that they could never afford to repay. As well as writing off this debt, Wonga is introducing a new set of lending criteria. These stricter rules are designed to make sure that fewer applications are accepted, meaning that only those who can afford the loans get them.

The agreement has been welcomed by critics who blame Wonga, and other payday lenders, for allowing and even promoting irresponsible borrowing. However, when it comes to apportioning responsibility for debts, Mintel has found that consumers are actually split over whether lenders or borrowers are to blame for unaffordable credit.

Borrowers should be helped, but not let off the hook

The Financial Conduct Authority’s (FCA) rules are unequivocal that it is a lender’s responsibility to ensure that credit is only issued if repayments are proved to be affordable. However, Mintel’s Consumer Attitudes Towards Debt UK  2014 report found that just 27% of people think that it is “unfair to expect people to repay debts they can no longer afford”. More than half (51%) of consumers actively disagree with this sentiment.

This is not to say that people think credit providers should not share responsibility to help their struggling customers repay debt. A huge 75% of consumers think that “credit companies should provide more assistance for customers in difficulty”. These widely-held consumer attitudes suggest that, for many people, there is a distinction between helping people and ‘letting them off the hook’.

Consumers want lenders to give struggling customers as much help as possible to get debts repaid, but reject the notion that borrowers should be able to cancel debts if they can’t repay them. Ultimately, nobody made these people take out credit, so they need to commit to repaying it, even if that requires significant assistance from their credit provider.

Hard-up consumers still see the need to repay debts

Mintel’s research found that even the majority of those who are struggling with their finances do not agree that it is unfair to expect unaffordable repayments. Some 40% of struggling consumers say it is unfair, while 34% disagree, hardly a resounding consensus.

Some of the consumers in this group are likely to have struggled with debt repayments at some point, or may still be struggling. However, over a third think that debts should be repaid regardless. This is perhaps the strongest supporting evidence for how widely-held the feelings of shared responsibility are.

Opportunity to salvage reputations?

These opinions do not specifically relate to borrowers who obtained debt they could never afford, which is what Wonga is acknowledging happened with their affected customers. However, if consumers feel responsibility for repaying debt should be so split between borrower and lender when a customer becomes unable to meet repayments, those who take on debt that they know they can’t repay from the outset are likely to receive less sympathy.

Despite this, most people are likely to see Wonga’s decision as a positive step. In many ways, the lender is effectively wiping the slate clean and starting again. If the stricter application process is implemented properly, we could see public opinion turning further towards blaming irresponsible borrowers for difficulties encountered, rather than lenders. In this respect, Wonga has an opportunity now to salvage its reputation, and that of its industry.

An unpopular opinion within the mainstream media is that payday loans, actually, can provide a useful service much more cheaply than unauthorised overdrafts. With the FCA banning multiple ‘roll-overs’ of loans, and a cap on charges due in 2015, payday loans could become much more attractive to consumers with short-term borrowing needs. If providers ensure this service is only given to people who can afford it, there is a chance for the positives of the product to outweigh the negative perceptions payday lenders have acquired.

Rich joined Mintel in 2013, and researches and writes a range of financial services reports. Prior to joining Mintel, Rich gained experience of lending and credit risk while working for HSBC. He has a BA (Hons) in Sociology.

Richard Shepherd
Richard Shepherd

Richard researches and writes a range of financial services reports at Mintel.

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