FYI: I first wrote this post back in 2013 – so you’ll see references to exchange rates that have moved a fair amount since.
Wonga.com has arrived in South Africa. I have seen the adverts on M-net.
Your adverts are so Madam-&-Eve-style cute.
So you know how I’m such a fan of microcredit? And how I love me a payday loan? Because they never take advantage or anything? It’s not like the UK wonga.com site has a representative example of the type of loan they offer, where a £150 loan for 18 days has an annual percentage rate of 5853%. Or anything…
And, obviously, I don’t ever use sarcasm.
But The SA Arrival Is Interesting
I’m not sure what the credit regulations are in the UK, but here in South Africa, we have the National Credit Act (the NCA), which is administered by the National Credit Regulator (the NCR).
And within the NCA, there are very clear limits on what interest rates can be charged on short-term loans. And they’re definitely less than the 5853% APR that you’d pay in the UK.
At least – they should be. After all, the NCA is there to prevent exploitation.
The NCA Limits
Because I’m a bit of a nerd, I have actually read most of the National Credit Act. But sending you in that direction would be boring; so here is a link to the consumer guide to the NCA (in english) published by the NCR. If you’re going to check up on me, the relevant section is Chapter 5, and you’re looking for the table on page 30.
By my understanding, Wonga.com would be offering short-term loans of less than R8,000 (that’s the limit of what they offer anyway), which makes the interest rate cap equal to 5% per month (which works out to an initial APR of around 80%*). So, I mean, that’s still high – but it’s not 5853% high.
*or 60%, if you assume simple interest.
The story does not end there. Because no payday loan exists without a host of other fees (initiation fees, service fees, etc).
So I visited the SA site, and started the process of applying for the rand-equivalent of a £150 loan for 18 days.
At today’s exchange rate, £1 will get me R16.41. So I’d be applying for a loan of roughly R2,460 – which is fortunate, because the loan limit for first time customers is R2,500.
At which point, I hit my first snag – because 18 days from now is a Sunday. So I’m taking out a 19 day loan.
Loan Principal = R2,460
Loan Repayment Period = 19 days
Interest + Fees = R469.52*
*Update: as of today, Monday 9 November, the total Interest + Fees is R489.54. Just an FYI.
And let me break down that R469.52 for you:
- R57.00 service fee;
- R66.91 interest; and
- R337.44 initiation fee
Check out that initiation fee. And that’s the LEGISLATED LIMIT!!*
*the limit on initiation fees is 15% on the first R1,000 plus 10% on anything above that, excluding VAT. I mean, with initiation fees like that – who needs the interest?
Now if you check my math, you’ll notice that my breakdown doesn’t quite add up to R469.52. And here’s why: I calculated the interest on the R2,460. Turns out, I’m missing the interest on the initiation fee – which roughly works out to the balance. To add insult to what is already a grievous injury…
So if you’re interested, that works out to an effective cost of 19.09% for the 19 days. And/or an effective annual rate of 446%*!
*assuming that each loan rollover is treated as a new loan
On An Even More Disturbing Note
Those initiation and service fees apply regardless of the length of the loan. So if I borrowed that R2,460 for the day, I would still pay R394.44 in fees. Making for an effective cost of 16% for the day. Making it a (compounded) APR of…
Wait for it:
Or 375 septillion percent for short.
What It Actually Means In Reality Though
The last number I gave is complete fiction, if I’m entirely honest. If I was to borrow today, repay tomorrow, then immediately borrow again, and pay again the next day, and so on, then I would be racking up R394.44 in fees daily for a year. So around R143,970 in annual fees, which works out to an APR of 5852% (fortunately, the principle of compounding doesn’t apply because the fee is fixed – which is why we’re not talking about septillions of percent).
And, to be clear, most of these pay day loans are for poor people.
How’s that for exploitation?
Wonka.com declares the following on their “we’re different” page:
“Wonga is different from other online lenders because our sophisticated risk and decision technology is means the application and approval process takes literally minutes.”
“We are the first company in the world to fully automate the lending process and we are able to make completely objective and responsible decisions around the clock.”
Forgive me my questioning eyebrow. They may indeed have an algorithm that covers the risk and credit approval side of things – but it is those initiation fees that make it worthwhile.
The interest. The interest is a red herring.
Do they run the risk of non-payment? Absolutely. But they start by offering you small loans, which are not too much of a headache to lose. They have access to your bank account, and you can’t borrow without one. You also have to demonstrate your income levels prior to that lightening quick approval process.
Whatever might be said about transparency, what people read is: “it’ll cost me R500 to borrow R2,500 – it’s high, but if I’m desperate, I’m desperate.” When the numbers get small, and the time periods condense – we don’t look at rates, we look at absolute numbers.
But maybe I’m wrong.
All I’m saying is – a R400 initiation fee for a fully automated initiation process seems like money for jam.
Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.