An interesting thing about those Wonga profits

One million hard-pressed borrowers prepared to pay interest at up to 5,853% have propelled Wonga.com into the league of Britain’s biggest lenders after the controversial payday loan company lent as much money last year as Britain’s biggest building society advanced in personal loans.

The Archbishop of Canterbury’s promise to “compete Wonga out of existence” has failed to dent the group’s frenetic expansion, it emerged on Tuesday, as Wonga said its profits had leapt by more than a third to £62.5m, with the number of loans granted growing even faster.

During 2012 it handed out nearly four million loans, worth a total of £1.2bn, to one million customers in Britain, matching the amount Nationwide granted in personal loans.


If you hand
out £1.2 billion in loans and your total profit is £62.5 million then you’re actual, real, interest rate being charged on your loans, after all costs, is 5.3%.

And here’s the really interesting thing:

Wonga wrote off £96m last year because it deemed the amount uncollectable. That’s £1.85m per week that Wonga is effectively giving away to poor people.

28 thoughts on “An interesting thing about those Wonga profits”

  1. I don’t agree with your conflation of “actual, real, interest rate” and “profit as a %age of funds lent”. These really aren’t the same thing.

    Comparing them is, however, a useful rejoinder to people who accuse Wonga of gouging the poor.

  2. Wonga isn’t giving the poor anything. The money is coming from other (mostly) poor people. That’s one of the reasons the interest rates are so high. That’s why Wonga couldn’t care less about its defaults and is happy to continue irresponsible lending. Losses are covered by other customers and Wonga still pockets a handsome profit.

  3. I thought the “interesting thing” was the whole point about Wonga, and glaringly obvious. They make very risky loans, and small enough that chasing up defaulters sin’t worth the effort. The only way to make money on that is to get the people who do give you money to cover the amounts you lose on people who don’t. That is, the good borrowers have to subsidise the bad ones.

    To me the better story would be “because lots of people cheat on their loan repayments, honest folk lose out”.

  4. Hi Mike (regrettably, not *the* Michael Power)

    How is a loan made to a borrower who wants the loan, is happy with the terms of the loan and who repays the loan “irresponsible”?

    I might accept describing loans to people who ultimately default as “irresponsible”. But no bank ever survived by lending money to people who don’t pay it back.

  5. Its very poor (and/or feckless) people being subsidised by other not quite so poor or feckless people. Wonga have no real input, they’re just the channel between the two groups.

  6. The point the anti-Wonga comments are missing is that nobody is forced at gunpoint to borrow from Wonga.
    If they are doing so it must be their best (probably cheapest) option.
    So they are getting cheaper loans, and Wonga is making a profit.
    So IMHO Tim is right; the money written off is effectively coming from business efficiency savings compared to the competition, not the other borrowers.

  7. All jokes about temples and money-lenders aside, I would be interested to see how Justin Welby’s eventual plans work out for him.

    I predict that he will either end up having to charge interest rates that are equally ‘punitive’ when costed out as APR, or he will go out of business. And it would be interesting to see the Church’s attitude to collecting on defaulted loans, too.

    In any case, it’s nice to see the church going back to its mediaeval practices. I assume indulgences will be coming back soon as well.

  8. Plus, Tim has the calculation wrong. You need the loan amount AND duration to calculate an interest rate. Assuming all the loans are 30 days (maximum term is 33 days) then the “profit as interest rate” comes out at around 63%.

    Which is clearly whoppingly, hugely, stonkingly more than any traditional lender could remotely hope to earn.

    Methinks His Very Reverendness might be right about a little more competition being no bad thing for this marketplace.

  9. Useful side effect of Wongagate: I’ve found it an excellent way to explain the economic concept of time preference to people, and thus how to understand interest rates etc.

  10. I assume indulgences will be coming back soon as well.

    Why not? Wouldn’t you rather be able to buy your way out of Purgatory than be trapped in it suffering?

    It’s always worth remembering that Luther- the rabid, Jew-baiting fundamentalist- was not some kind of liberal reformer. His complaint about indulgences was that the Church was letting the sinners off easy, and as a priest with a monastic background, he wanted God’s punishment ladled on, with no avoiding it. People pull quotes out of the 95 Theses out of context, like the “penny in the money box” thing, and you need to read the whole thing to really grasp the malignant Lutheran argument.

  11. you what?

    If I lend you £10 and charge you 5% interest, then the interest I am *really* charging us is 5%, and it doesn’t matter what my overheads, cost of capital etc. are, that’s quite a separate question. You might as well say that if I sell a iced bun to you for 50p but it cost me £1 to make, then the real price I am charging yo is -50p. No, the price is 50p.

    I think if somebody else – say, a leftie – had written that you’d treat them to your usual invective filled disdain

    plus I worry the timing of the £120bn and the £62.5m might not align.

    suppose I have £100 to lend out. Each week I lend out £100 and am repaid with interest, then I lend out the same £100 next week. So over the course of the year I have extended £5,200 of loans. Then say I make £52 profit. I’d say my return on that £100 is 52%, not 0.01%. Are you sure the £1.2bn figure isn’t equivalent to the £5,200 in this example?

  12. Basically, if the Church can cherry pick the good borrowers then the wonga business model is done. But it cannot be done with social finance and credit unions – which appears to be Welby’s idea, the costs are too high and the Church lacks information.

  13. @ken, but Wonga is also cherry-picking the good borrowers. Relatively speaking, of course. This must be true since they claim to reject most credit applications.

    They are just less selective (and shorter-term) than most lenders. But all lenders are selective, have to be, in order to offer competitive rates to customers they actually want and to not have to deal with customers who default.

  14. I have to say I really like Welby’s idea — not because it will necessarily work (I have no idea), but because it shows his underlying attitude is “Don’t just whine, do something.” He hasn’t demanded any new laws; he hasn’t demanded that the thing he dislikes be banned; he understands the concept of a gap in the market and understands that the best way to beat a rip-off merchant is to undercut them. Can we have more lefties like this, please?

  15. Luis,

    > If I lend you £10 and charge you 5% interest, then the interest I am *really* charging us is 5%, and it doesn’t matter what my overheads, cost of capital etc. are

    Yes, yes, and I’d be astounded if Tim isn’t well aware of all this, but his point is still a very useful and illustrative rejoinder to those who think it makes sense to bandy about the annual interest rates of loans which typically last a fortnight. Wonga don’t charge anyone 5853%, and their profits are proof of that, as they would be totally different if they did. The figure is so preposterously disconnected from reality that a back-of-the-envelope calculation like Tim’s is good enough to make the point.

  16. Mike,

    > Wonga isn’t giving the poor anything. The money is coming from other (mostly) poor people. That’s one of the reasons the interest rates are so high. That’s why Wonga couldn’t care less about its defaults and is happy to continue irresponsible lending. Losses are covered by other customers and Wonga still pockets a handsome profit.

    Yes. This is called “banking”. In fact, what I think is your main point — “Losses are covered by other customers” — is called “business”. If your losses cease to be covered by other customers, that is called “bankruptcy”. Since no company on the planet does that voluntarily, what was your particular point about Wonga?

  17. I’m not fully au fait with the treatment of loan issues as income/costs, but Wonga’s financial statement for the period shows revenues as £309M. Profit of £62M on income of £309M is 20%, give or take.

    A 20% return is pretty healthy, and in a risky business it doesn’t seem that excessive. Of more interest is the fact that profitability has fallen as loan issues have risen. Seems they’re getting proportionately more defaults.

  18. Couple of points – aside from the question of whether all these numbers apply to the same period of time, it’s not clear whether these are gross profits, or whatever. I believe Wonga are spending quite a lot on growth at the moment?
    Plus Luis’ point, of course.

    Also, regarding the ‘giving £96m to the poor’ – how much of that is written-off interest, rather than loan? Not quite the same thing.

  19. it shows his underlying attitude is “Don’t just whine, do something.” He hasn’t demanded any new laws; he hasn’t demanded that the thing he dislikes be banned;

    Yes, I will give him a certain amount of credit for this. it would have been far easier to demand that someone else do something, which I’m pretty sure would have been the attitude of his learned-and-mellifluous-but-my-what-a-lefty predecessor.

    Don’t think Welby is a lefty, is he? Churchman, yes, and these days the Church of England, far from being “the conservative party at prayer” seems to be “the liberal demoncrats in frocks”. But he seems to be to the right of Rowan, at least.

  20. Have no clue how the Archbishop plans to compete Wonga out of business but will credit him for at least having the idea.
    Businesses seeing a gap in the market (in this case a cheaper competitor to Wonga) have a chance of making money. Whether they can do so by taking the best borrowers from Wonga or not is open to question. They don’t need to but will likely get also the worst borrowers. Factoring in the problems has to be done in business – the shoplifting, lost post, breakages, bad borrowing or whatever. And covered like all other costs.

  21. JamesV

    If an online non-profit was nearly as selective as Wonga, but able to undercut them on price, the Wonga business model would fold as the good customers who pay properly would desert to the non-profit. If this could then be tied to better financial management by the poor, even better.

    Welby’s idea of using Church sites is not going to cut it though. It lacks the reach and efficiency necessary to undermine Wonga.

  22. Sam,

    > Don’t think Welby is a lefty, is he?

    Don’t know, but, regardless, can we have more lefties like him, please?

    > But he seems to be to the right of Rowan

    Interesting benchmark you’ve got there. You may need to recalibrate.

    My mum knows some relatives of Rowan. When he was appointed, they were crowing proudly about how a member of their family was so amazingly important. After he’d spent a little while in office, they started avoiding the subject.

  23. “Have no clue how the Archbishop plans to compete Wonga out of business but will credit him for at least having the idea.”

    In return, Wonga can invest in some children’s homes where the employees don’t abuse the children in their care and thereby compete the CofE “out of the market”.

    Wonga has a couple of women as directors, perhaps the CofE might consider competing with them on that score as well?

  24. Giving away to poor people? Nonsense. Wonga can’t collect money it loses in fraudulent loans owing to poor credit checking facilities. It’s the poor Wonga are helping, it is criminals. Read some of the testimonies of people who have been defrauded via Wonga, they all say Wonga tried to settle out of court. Writing off is written into their model. But they don’t give money away to the poor.

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