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Something is wronga than Wonga

10 October 2014

The deprivation in which loan sharks are able to flourish is the real problem, says Paul Vallely

HELL, Dante writes, has seven circles, and even these have sub-circles. In the lowest sub-circle of all - lower even than violent murderers - the poet places the chargers of extortionate interest. Once, the Church had a name for it, usury, until the Protestant work ethic and the rise of capitalism glorified it as risk-taking, and therefore a legitimate business activity. Wonga has made us think again about all that.

So it is excellent news that the most infamous name in payday lending has been forced by the new teeth of the Financial Conduct Authority (FCA) to wipe away the £800 rolled-over debt of a man who borrowed £150 to go on holiday - and the debts of a third of a million other customers who took out loans without the lender's checking that they could afford to pay it back.

This is something of a victory for campaigners such as the Labour MP Stella Creasy and the Archbishop of Canterbury, who two years ago vowed to drive lenders like Wonga out of business by setting up church credit unions to provide an alternative source of loans for poor people.

They helped to change the climate of acceptability that Wonga had attempted to establish, with its jolly cartoon adverts of unlikely-looking old ladies in twin-sets as typical Wonga-borrowers - or, more plausibly, its adverts on the football strips of clubs in impoverished areas such as Newcastle and Blackpool, where one fan was invited each week to kick a ball through the O in a giant Wonga advert in the hope of winning a £150 prize.

More directly, Citizens Advice discovered that in half its pay-day loan cases, lenders had not properly checked to ensure that borrowers could afford to repay. It was for this reason that the FCA forced Wonga to write off so many debts.

A failure to make such checks is not always an error. It is part of the payday lenders' business plan. Legalised loan sharks know that many borrowers will never repay; so they charge those who do pay such sky-high interest rates that the profits outweigh the bad debts. Those who do pay are often badgered into doing so by daily phone calls, which announce that the interest has taken the total ever higher. There are other disreputable methods, too: Wonga was fined £2.6 million for sending threatening legal letters from fictitious law firms to 45,000 customers in June. "Wonga is not the bad apple," Ms Creasy said. "The industry is a rotten barrel."

The most effective strategy against loan sharks, legal or black-market, requires something more fundamental. It means doing something about the social circumstances of unemployment, low wages, welfare squeezes, and public-spending cuts. Before the recession, there were 300,000 people taking payday loans in this country. Today, there are five million, in an industry - if you can call it that - that is worth more than £800 million a year. Do the maths. Loan sharks will not vanish until the deprivation in which they flourish is addressed. There is something wronga than Wonga.

Paul Vallely is a Senior Fellow at the Brooks World Poverty Institute at the University of Manchester. www.paulvallely.com

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