Payday loan lenders have been told they should feel “on notice” after one of the industry’s biggest names, Wonga, agreed to write off substantial customer debts.
The payday lending sector has been facing growing criticism in recent months and years, particularly for failing to properly assess customers’ ability to repay their loans without running up punitive levels of interest.
High interest rates are a hallmark of the sector, but the argument is that as long as the loan is repaid within a few days – ‘on payday’ as its name suggests – the actual amount of interest incurred stays fairly small.
But when the loan is not repaid in full quickly, the amount owed can rise rapidly, with some headline rates of APR reaching into the thousands of percent.
A statement from the Financial Conduct Authority confirmed that Wonga have entered into a voluntary requirement, or VREQ, requiring significant changes to the way the company conducts its business.
“When it took over regulation of consumer credit in April of this year, the FCA requested information about the volume of Wonga’s relending rates,” the FCA explains.
“The information received suggested that Wonga was not taking adequate steps to assess customers’ ability to meet repayments in a sustainable manner.”
The VREQ now means 330,000 customers with arrears greater than 30 days will simply owe Wonga nothing at all, while a further 45,000 customers with arrears less than 30 days will be given four months to pay off their debt interest-free.
Director of supervision Clive Adamson said: “This should put the rest of the industry on notice – they need to lend affordably and responsibly.
“It is absolutely right that Wonga’s new management team has acted quickly to put things right for their customers after these issues were raised by the FCA.”
As of October 2nd, Wonga introduced new interim lending criteria designed to immediately raise standards, while working on a permanent lending decision platform to be introduced as soon as possible.