Could Wonga's critics be any Wronga?

Posted by Christie Malry on January 6, 2013 at 8:17 am

The Guardian has a slightly crowing piece about Wonga's bad debts:

Wonga's latest accounts show the firm wrote off £76.8m during 2011 because thousands of loans proved to be "uncollectable". The bad debt bill is equivalent to 41% of Wonga's £185m revenues for the year and is almost four times the figure for 2010. Filings at Companies House spell out that an associated accounting impairment was "mainly related to customers who are in unexpectedly difficult economic situations".

A spotlight on the legion of financially distressed Wonga borrowers comes at a sensitive time for the booming payday loans industry. The company recorded pretax profits up £45.5m to £62.4m for 2011

Sure, £62m on turnover of £185m is a lot of profit. But it has to be considered in the context of the bad debt writeoffs of £77m. As I have argued before, payday loans companies need to charge high APRs because their loans are for a short period of time and they know that there's a significant risk that they won't get their money back. Therefore they need to charge enough interest to those who do pay their loans back to cover the bad debt cost of those who do not.

I'm sure Wonga would much rather it could know in advance who was going to default. Then it could charge its non-defaulting customers a lot less for its service. But that's not the way lending works. Necessarily, it has to be approached as a portfolio, and that means borrowers who repay must pay more to cover the cost of those who don't.

And, given how it was bad debts that brought the banking sector to its knees, isn't it a bit ironic that this segment of the industry is being taken to task for behaving responsibly?

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