And why it’s a symptom of something that is much worse.
This week, Wonga went into administration. Nobody will mourn its demise writes the guardian. It’s hard to understand how a company with such a terrible product (incredibly expensive debt) could thrive – but this is modern Britain. I would like to think that Wonga was able to exist and make its directors fabulously rich before the collapse (probably). The reason it collapsed was due to previous borrowers claiming compensation for the cost of their borrowing. Personal responsibility is neglected, it’s all Wonga’s fault.
My view is that for many people Debt = Wealth and the collapse of Wonga won’t do anything to stop the root cause.
The Shame of Poverty
I’ve had a theory for some time now that says that there is a stigma around being poor, nobody would want to be poor so if you are poor, you need to act in a way that makes people think you are rich. This means you see poor people displaying indicators of luxury and high status. Items include:
- The latest and expensive mobile phones
- High cost home entertainment system
- New luxury cars
- Designer clothes
- New furniture
- Shop for advertised branded processed foods
You might notice that for each of these items they:
- Have an expensive contract
- Use it to inform their purchasing decisions
- Lease or hire the car
- Buy on a credit card
- Pay monthly from DFS
- Value the assurance that a branded shop gives you
For all of these things, you’ll find that poor people spend more than someone who is frugal.
GFF has some neighbours who fit all of these categories and are literally down to their last pennies every month before pay day. But on the face of it, they are the ones driving the SUV whilst texting on their iPhones.
If you think that I am very wise, I have just read a bit and Affluenza by Oliver James influenced me a great deal and has taught me that envy and jealousy are symptoms of greater problems and that possessions won’t ever satisfy the need.
So, what has this to do with Wonga?
Since people who spend all of their money end up poor but with their underlying needs unmet – which is in part to not feel poor – they will do anything they can to get their hands on the money to buy more things. It’s a debt addiction. Things you can buy can help you achieve love, belonging and esteem (other others) but not of yourself so your needs are unmet.
Well, I don’t think that debt/credit isn’t important – it’s the foundation of money – and I use it – I’ve got a huge mortgage, a credit card (paid off every month), I’ve stoozed in the past and I had a student loan from my studies (since repaid). It’s also right to borrow from your future self to invest. But it’s not a good idea to borrow to spend – that’s just making it harder on future you.
I do think that Wonga and pay day loans business practices are shameful and immoral. They prey on the weak, stupid and vulnerable. I don’t have a TV but when I go watch TV now and then, I am always shocked at the amount of ads for Payday Loans, Gambling and consumer products that you don’t really need. TV also makes the reality of TV seem so much better than real life.
Wonga’s gone bust
Swiftly into administration Wonga goes, the media is crying about how terrible the company is and how its users are the victims. But much like going to AA, I think that the public must take responsibility for their. Nobody who borrowed money from Wonga would have thought it was cheap, sure, it was quick, easy and convenient. It might have been cheap for a short term loan but it’s no way to fund your debt fuelled shopping spree of a life lived beyond your means. With Wonga, you could borrow money in a few minutes – enough to tide you over. But pay day loans are the crack cocaine of the debt industry. If you don’t know how to manage your borrowing, you will experience the adverse effects of compound interest.
Wonga use to lend at around 5,000% APR. That would turn £100 into a Million pounds in less than 2 ½ years. With potential returns like that – who wouldn’t want to lend to dead beats?
There’s been a bit of discussion recently about cash buffers in the FI community. my view is that you need to manage your cashflow actively – plan money coming into and out of your account and have credit/overdraft facilities available in case you need it. I typically have less than 1% of my assets in cash – but I can summon great hordes of cash in the space of a day, a week, a month if needs be. But enough about GFF.
For the average person, I think that a lot of the pain caused by pay day lenders could have been averted by having a cash buffer, rainy day funds. Unfortunately, many people aren’t in that position and I’m sure that there are factors like zero hour contracts, rents rising faster than earnings and many other things that make things harder for people. But thinking about things differently, a 25 year old who has been working for 7 years on the minimum wage for 35 hours a week (ignoring benefits) has had over £50,000 pass through their bank account. If you need to go to Wonga for £200, where has all that £50,000 gone? What else did you spend £200 on (and did you need to?)
I’m not trying to be unkind, but I think that the stigma of being poor – or not appearing affluent is at the root of this problem. We are richer than ever but have more debt as a result. I know that the Gentleman and his Family are looked down upon for not having the right designer clobber and driving cars that don’t have iPhone sockets – but we have the strength to not let it affect us. As Jesus said, the poor will always be with us and I’m sure that after PPI payouts, payday loan users will get big checks with some of their money back and will they save that money? No, they will be renting new cars and sofas and phones and going on package holidays and shopping trips with their latest compo claims and we’ll be back to square one.
Once again, the prudent pay for the profligate, this is why FIRE is one way out of this mess for us, for you and for everyone.