In what is already kicking up a spectacular twitterstorm, payday loan company Wonga are giving financial advice to students.
The company, which offers short-term loans with a representative APR of 4214 per cent, has a page on its website which encourages students to consider whether a Wonga loan should substitute part of their student loan.
Student loans are usually far cheaper than your standard personal loan. But there can be a downside – you potentially end up borrowing more than you need, while a nasty debt accumulates for your gradation that could take years to repay. With a Wonga loan the interest rate is much higher, but you only borrow it for a month and pay the loan back on a date that suits.
The interest rate on student loans is between annualised inflation and inflation plus three per cent, depending on the income of the graduate. Currently, this is between 4209 and 4206 per cent lower than that on Wonga loans.
But it’s OK, because:
Wonga encourages responsible borrowing because, depending on your trust rating, you can borrow as little as £1 up to £1000, as long as you can repay it within a month.
The company’s most dangerous piece of advice is telling students to:
Only take out a student loan for exactly what you need and then use Wonga for those odd times when you’ve got too much month at the end of your money.
If you take out a £400 Wonga loan and pay it back thirty days later, you will pay over £125 in interest. If you take out £400 more than you need on your student loan, it will take three and a half years to cost that much in interest, and that’s assuming our current high levels of inflation stand.
Wonga also recommend taking loans from them to go on holiday:
When your mates tell you about finding a deal on plane tickets to the Canary Islands, you’ve got some options. Maybe you don’t have the money to pay for the whole thing now, but you will when you get your wages at the end of the week. Enter, Wonga!
Nowhere in Wonga’s advice does it mention the existence of university hardship funds, which offer students low- or no-interest loans and grants to get them through rough patches. This is not an attempt to help students with finances – it’s an attempt to prey on the financially inexperienced.
• Need for affordable credit ‘big bang’ to aid low income communities – Kevin Gulliver, June 27th 2011
• 4,214 per cent APR. Interested? – Byron Orme, April 16th 2011
• Payday lenders: the need for urgent action – Damon Gibbons, January 30th 2011
• Time to muzzle the legal loan sharks – Lisa Nandy, December 12th 2010
• MPs call for end to loan sharking – Joe Cox, September 8th 2010