BSB107 Chap.7 Payday Lending and the Wonga Case
Payday Lending and the Wonga Case
Credit at a high price
Payday loans are short-term, high-cost and usually unsecured, repaid from the next pay and easily rolled over.
The prescribed case follows Wonga.com, which charged an APR of 4214%, later 5853%, before UK regulators intervened.
Regulation and ethics
From 2015 the UK capped daily interest, default fees and total cost, and Wonga entered administration in 2018. The case tests the lender's defence against Kant, Aquinas and Rawls, which is the debate the tutorial asks you to take a side in.
Questions for the tutorial
The tutorial asks what payday lending is and whether it is good or bad, and whether Wonga.com provided a useful service or exploited its customers.
The recommended Moneysmart advice on payday loans gives the Australian consumer view, and the vocabulary sheet supplies precise terms such as loan shark and predatory lending.
The case also links back to Topic 1, where about a quarter of the Australians surveyed by the University of Newcastle reported taking a payday loan in the previous year.
What this chapter covers
- 01
What payday lending is
- 02
Rollovers and escalating balances
- 03
Wonga's growth and fall
- 04
The UK cost cap and its three parts
- 05
Comparing short-term credit options
- 06
Ethical arguments for and against
Worked example · free
The most a borrower can pay under the cap
- +130 days: 100 × 0.008 × 30 = £24.
- +1Charges are capped at £100, so the most repaid is £200.
- +1Daily interest is £0.80, so 100 ÷ 0.80 = 125 days to reach the cap.
Key terms
- Rollover
- Extending a payday loan into a further period instead of repaying it, usually for an extra fee.
- Predatory lending
- Lending that exploits borrowers by deceiving, defrauding or pressuring them.
- Usury
- The excessive charging of interest; in some times and cultures, any charging of interest at all.
- Loan shark
- A lender who charges excessive interest, a term associated with predatory lending.
Payday Lending and the Wonga Case FAQ
Why were payday loans so expensive for borrowers who rolled over?
Their high APR was defended as irrelevant for loans repaid in days. Once borrowers extend or take new loans to repay old ones, the case explains, the interest actually paid begins to approach that representative APR, and fees compound the cost.
What did the UK regulator change in 2015?
The Financial Conduct Authority capped expensive short-term lending: interest of no more than 0.8% a day, fixed default fees of no more than £15, and total interest and charges no greater than the amount borrowed.
Was Wonga providing a useful service?
The case presents both sides. Wonga offered fast, convenient credit and compared its price to a taxi fare, but critics point to rollovers, misleading collection letters and most customers ending up unable to repay. A good answer weighs both and reaches a view.
How did Wonga end?
Compensation claims kept mounting after the regulator's interventions, Wonga raised £10 million from shareholders in August 2018, and on 31 August 2018 it stopped accepting customers and went into administration. The case argues redress claims, more than the rules themselves, finally stifled the business.
What is a rollover in a payday loan?
A rollover extends the loan into a further period instead of repaying it, usually with a fee. US data cited in the case show that in over four cases out of five, a payday loan was extended or replaced by a new one within 14 days.
Why did lenders say APR was a misleading measure?
They argued that an annual rate overstates the cost of a loan meant to last days or weeks. The case answers that rollovers turn short loans into long ones, so for many borrowers the cost actually paid moves towards that annual figure.
Exam move
Summarise Wonga as a timeline of five dates and amounts. Draft one paragraph defending payday lending and one attacking it, each anchored to a fact and to Kant, Aquinas or Rawls, then commit to a verdict. Drill the cap arithmetic: daily interest ceiling, default fee ceiling, total cost ceiling.
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