Wonga reduces representative APR from 5,853 to 1,509%

Wonga has implemented a reduction in its fees and daily interest rate that are charged on short-term loans. The widely recognised payday lender stated that it has voluntarily slashed the charges in anticipation of new rate caps.

Wonga announced that it was reducing the charges so that it could “provide short-term lending to the right customers in a responsible and transparent way.” It should be noted that while the lender made the reductions before the government required it to do so, the changes bring it in line with the restrictions that the Financial Conduct Authority (FCA) is imposing on all firms as of 2 January, 2016.

These are the changes that are being made to the popular payday loan product:

• Daily interest charges are reduced from 1% to 0.8%.
• Dubious £5.50 transaction fee has been terminated.
• Missed payment fee has dropped from £20 to £15.
• The minimum loan amount has gone up from £1 to £50.

The result of all of these changes is a new rate calculation. The representative APR had been 5,853% throughout nearly all of 2014, yet drops to 1,509% for 2015.

There is another important restriction that Wonga will have to adhere to. They cannot charge more than double an amount that was initially lent to the customer. All lenders are regulated by the FCA and all will have to meet these requirements. Wonga is the first major firm to proactively implement the changes ahead of the deadline.

The timing of the reduction has been criticised as being done for the purpose of reducing the number of loans that would carry over from one rate classification to another. Some claim Wonga is simply trying to avoid restating the terms on individual agreements that would span the period of 2 January. This is likely one major consideration, though Wonga could certainly use some positive headlines after getting slammed on reports of using fake law firms to collect debts.

Whatever the motivation, the firm is taking the initiative to comply with the fee restrictions before the stated deadline. Even with the lower costs, it would be difficult to claim that customers were winners. After all, they are still paying a four digit representative APR.

The lower fee structure combined with the new affordability checks is expected to have a disastrous impact on earnings for most firms. Wonga is likely to survive in the new regulatory climate, but it will likely post smaller earnings as a result of the changes.

One thing that will help it is that it is large enough where it could absorb the market share of smaller competitors that are forced to drop out of the market. Some analysts claim that only firms like Wonga who can leverage economies of scale will be able to survive on the lower earnings. It is notable that there are plenty of firms operating elsewhere that charge considerably less than what the FCA limits are on UK firms, yet they are extremely profitable. It may take a couple of years for the impact on the marketplace to be fully realised, at which point additional rules may be enacted.