Wonga cancels debts for 330,000 customers

In a shocking announcement, payday lender Wonga has decided to cancel the debts owed by 330,000 of its customers. That represents a total of £220m in account balances will be wiped out. Customers owing the cancelled debt no longer have to repay.

Not all Wonga customers will be granted a payment reprieve. Those who are affected by the gesture have been told that a notice would be provided by 10 October.

Some who owe balances will at least be provided with the ability to repay the amount owed interest-free. This applies to approximately 45,000 customers who are in arrears.

The decision to cancel such an enormous amount of consumer debt represents a reportedly voluntary arrangement between Wonga and the Financial Conduct Authority (FCA). It was Wonga’s decision to write of the debt.

Of course, any realistic consumer advocate can tell you that substantial pressure was likely placed on Wonga by the FCA to correct certain perceived wrongs. The primary issue was the ability of customers to reasonably afford the loans.

Payday lenders had long stated that they utilised certain checks to avoid lending money to those who were ill-prepared to repay the amounts owed. Wonga had previously referred to its technological advantage of being able to identify poor credit risks and deny loans to such applicants. However in this announcement, new Wonga Chairman Andy Haste acknowledged that lending decisions had not always correctly identified those who could not afford the loans. This radical debt cancellation signals the start of “real and urgent” changes at Wonga.

The news is perhaps a wakeup call to other payday loan companies that hawk usurious products on desperate consumers that are barely able to afford to live, much less repay debt. Debts with APRs that exceed 1000% are simply unaffordable, and some products go well above 5,000% APR.

How far does the Wonga move go?

Considering that Wonga has about a million customers annually, this could affect a pretty substantial share of its business. Of the 330,000 customers who will benefit from the debt write off, many originally obtained the loans prior to 2014, so it is difficult to tell what percentage of customers will benefit. Since some customers obtain multiple loans, it further muddies the water on what can be expected.

Wonga customers should look for the notice that is to arrive by 10 October. If no notice is received they may contact their Wonga customer service agent if they choose to enquire about the status of their account. Normal collection activities may continue on defaulted accounts that are not a part of this cancellation of debt.

As perhaps a bellwether of the entire payday loan industry in the UK, it is anticipated that FCA will force lenders to properly vet applicants to ensure that they are a reasonable credit risk. Customers who falsify income on applications may no longer experience automatic approvals as they have in the past.

FCA has essentially started reforms with the biggest firm in the UK. Others will be expected to follow a similar path or they risk punitive measures.