Massive Payout Exposes Ugly Underbelly of Payday Loans Collections

Debt campaigners outside St. Pauls in 2011 - Photo credit acute_tomato

Debt campaigners outside St. Pauls in 2011 – Photo credit acute_tomato

Payday loans provider Wonga was hit with a whopping £2.6m compensation payout yesterday, as the market leader’s carefully constructed squeaky-clean image was blown wide open as a fallacy.

Far from offering “completely transparent charges” as claimed on its website, the company shouldered the largest ever compensation payout from a UK payday lender because of its debt-collection policies, where letters were sent to borrowers threatening legal action from made-up law firms. In some cases Wonga also added extra charges to its customers for ‘administration fees’ of the non-existent law firms.

Wonga offered a begrudging apology to 45,000 affected customers for its “historical” actions and “system errors”, and claimed that it would be “contacting anyone affected proactively”. This stance was somewhat undermined, however, by the company consistently ignoring complaints and criticism from members of the press, as well as from Labour MP and anti-payday loans campaigner Stella Creasey on Twitter.

The payday loans sector has long come under criticism for its sky-high rates and ability to trap people into spirals of problem debt, but Wonga has tried to cultivate the image that it is the responsible and trustworthy exception that bucks the trend. By looking at Wonga’s collections policy, we can see this for the marketing ploy that it is – usurious rates still push people into poverty, particularly when coupled with bullying tactics and unorthodox collection practices that border on harassment.

Wonga is by no means the only problem-debt lender that pursues dodgy collection practices though. Indeed, an entire industry of doorstep and high-street lenders has cropped up since the recession, who provide credit to those who generally can’t get it elsewhere. With such a gap in provision for the financially excluded, lenders are able to take advantage by charging such high rates, and many will go to extreme lengths to collect these burdensome debts.

Take Brighthouse for example, the market leader in selling household essentials on high-interest credit. This “rent-to-buy” model can be appealing because it offers people the chance to purchase items without the upfront cost, paying instead on weekly repayment plans. By combining high interest rates with inflated prices, however, customers often end up paying 2 or even 3 times the value of the products – another egregious example of the poverty premium in action.

To keep clawing in these repayments, Brighthouse has developed an unorthodox method of collection that relies on the peer pressure of social networks. At the point of lending the store takes the phone numbers of 5 friends of the borrower – and then repeatedly phones all of them if the person runs into any difficulty in paying them back.

This type of aggressive collection is extremely pernicious and damaging, because it causes unnecessary emotional and psychological harm not only to the borrower, but also to people who had nothing to do with the original purchase in the first place. In turn, this places increasing strain on the social and familial relationships that often go so far in supporting and sustaining those from lower income households, helping to accelerate social breakdown and spirals of poverty.

If Wonga’s payout showed that even the self-styled darling of the industry is still an ugly and manipulative lender, then it follows that a whole host of dubious practices continue to thrive within the sector. With companies such as Brighthouse continuing to develop imaginative and distressing collections policies, it’s more imperative than ever to remain vigilant to such exploitative practices – as well as to develop ethical and sustainable alternatives to such problem-debt provision.