What the Wonga write-offs will mean for payday borrowers

By Benjamin Salisbury

Thousands of consumers who received payday loans from Wonga will have their debts written off. But if you're one of those consumers, you may be left with some questions: when will the debt be written off, will the write-off affect your credit score and will you be able to secure loans in the future? Here is the rundown of what you can expect to come from the scandal.

The background
Wonga, the largest payday loan company in the UK, is to write off £220 million in debts for 330,000 customers after agreeing with the Financial Conduct Authority (FCA) to conduct new affordability checks. A further 45,000 customers will have interest frozen on their loans but will still have to repay their existing arrears.

The payday loan industry has been criticised for aggressive debt collection practices, irresponsible lending and astronomical interest rates. This led the Office of Fair Trading (OFT) to investigate the 50 biggest firms in 2013 to see if they were adhering to the rules. loan-write-offs

The OFT wrote to each firm, setting out the changes needed to ensure they lent legally. The FCA reported that 14 of the 50 firms responded by leaving the payday loan market. (The OFT has now closed and its remit passed onto the FCA.)

Wonga agreed with the OFT and FCA criticisms, admitting that it had not followed affordability rules and many loans should never have been issued. Wonga also agreed there was an urgent need for change to ensure it only lends to people who can afford to repay the loan.

"The FCA is right to come down hard on Wonga after it found it had poor affordability processes but it is not the only lender guilty of this; it is a widespread problem within the industry," Gillian Guy, chief executive of Citizens Advice, said in an emailed response to questions. "Citizens Advice has found that in half of payday loans cases reported to us, lenders didn't ask about people's personal finances."

What Wonga borrowers need to know
If you are affected by Wonga's decision (and your loan is going to be written off or the interest on it frozen), you should have received an email from Wonga in early October 2014 to explain the next step.

In the email, Wonga states that it "will automatically clear any outstanding debt you have with us" by the end of October 2014. You should continue to make repayments until Wonga confirms it will write off your debt.

If your Wonga loan is cancelled, there will be no trace of it on your credit record, aside from the initial application.

"We are working with Wonga to make sure that affected customers' credit reports are updated to reflect the position they would have been in had these loans not been granted," James Jones, head of consumer affairs at credit agency Experian, said in an emailed response to questions. "This means that any account records for these loans are being completely removed from customers' credit reports. The search footprints will remain, however, to reflect the fact that applications were made."

New affordability checks
Wonga is working with the FCA to develop new affordability checks, meaning Wonga will offer far fewer loans to new and existing customers.

The changes also mean there will be greater scrutiny of loan-to-income ratios. Before, people who made late payments and customers rejected for credit reasons could immediately reapply for a loan; now, they will face an automatic block for 30 days.

"Wonga will implement measures to improve its affordability assessments to ensure customers are treated fairly and lent to in a sustainable manner in accordance with applicable regulatory requirements and guidance," said a statement from the FCA.

There is, however, no indication that Wonga or any other payday firm is cutting interest rates, so payday loans remain a highly expensive form of borrowing.

Implications for the wider industry
Although the FCA wants to ensure payday lenders follow the law, it does not want to ban them completely.

In April 2014, FCA Chief Executive Martin Wheatley said, "We believe that payday lending has a place; many people make use of these loans and pay off their debt without a hitch, so we don't want to stop that happening. But this type of credit must only be offered to those that can afford it."

Because of Wonga's large size, other, smaller payday loan firms are likely to follow the change in lending criteria.

But in reply to an emailed question asking what the implications for the industry will be, a spokesperson from the FCA said, "One investigation does not set a precedent for another. We cannot confirm or deny whether there are any other investigations underway.  Any investigation takes into account all aspects and any mitigating factors."

Still, there is no doubt that many other sub-prime lenders have followed similar practices in the past, so other firms could be investigated and it is clear that the FCA will scrutinise the sector closely.

A further change is that, in future, consumers will be able to search for payday loans through a comparison site, making it easier to compare loans and find the cheapest. This should drive prices down and provide clearer information on fees.

See related: Payday lenders face severe crackdowns, Don't let nontraditional loans lure you to debt

Published: 17 October 2014