British Loan Provider’s Steep Rates Under Siege

Bathed in golden light, backed by dreamy music, the men and women described their prized possessions. Money? Barely mentioned.

But the short film, commissioned by Wonga and released online this month, backfired — by drawing further attention to the company, Britain’s biggest provider of payday loans, which critics have assailed as a predatory practice at a time of economic hardship. Stella Creasy, the Labour Party spokeswoman for business issues, posted on her Twitter account: “you can find 12 happy customers, I can provide you with 1200 caught in toxic payday loan trap.”

Responding to the controversy, the Conservative government — whose regulation of such lenders has been light compared with the United States, France, Germany and other European countries — said on Monday that it would propose a law to cap borrowers’ costs for payday loans.

Wonga, which offers small loans online at high interest rates, has found a market among Britons who need quick cash for short periods, something British banks rarely provide.

Of the few hundred payday lenders in Britain, Wonga is the leader by far. It made 1.16 billion pounds ($1.9 billion) in loans last year, about half of the country’s payday loan market. The company had a net profit last year of £62.5 million on revenue of £309 million.

Critics say payday lenders exploit the poor. Wonga typically charges a daily rate of 1 percent on a loan of up to £1,000. A £150 loan over 18 days, for example, will cost a client £33.49, including fees. Over one year, if someone could not repay, that would be equivalent to an interest rate of 5,853 percent when the charges are compounded.

The archbishop of Canterbury, Justin Welby, a former businessman, is among Wonga’s most vocal critics. “An interest rate of over 4,000 percent has been considered usurious since the time of Moses,” Archbishop Welby said, as quoted by the Guardian newspaper. “It’s no different now.”

Wonga executives declined to comment for this article. But Errol Damelin, who co-founded the privately held company seven years ago and gave up his role as chief executive to become chairman two weeks ago, has described Wonga as “a powerful force for good in the financial world.” Writing in The Telegraph, he added, “We are challenging the tired and incompetent banking industry by offering new products and services that are relevant to a digital age.”

Wonga has drawn fire because it is the industry leader, said Martin Lewis, the creator of the personal finance website MoneySavingExpert.com. “It’s a marketing-created demand for instantaneous cash,” he said. “It’s done in one click.”

While most lenders rely on conventional methods like credit scores from a third party to assess borrowers, Wonga says it uses an algorithm that pulls together 8,000 pieces of data about borrowers from the Internet, including Facebook profiles. Its lending decisions are made instantly and loans can be transmitted to a borrower’s bank account in five minutes — a process Mr. Damelin says is like “buying a song off iTunes.”

Wonga argues that it competes favorably with bank overdraft fees. And some proponents say the clarity of the company’s website is a major improvement over the way British banks deal with clients who overdraw their accounts and are punished by high interest rates and penalties that are buried in fine print.

Wonga released the promotional film, called “12 Portraits,” this month. The ad, by the British director Gary Tarn, features a series of ostensibly happy clients. One of them, Angela Asquith, describes borrowing £200 and repaying £235, including interest and fees, 14 days later. Another, Dennis Carmichael, a professional karaoke singer, borrowed £101 to finance his travel costs between gigs. Four days later he repaid £111. In the film, at least, these and the other Wonga customers had no complaints.

But the film seemed only to lengthen Wonga’s already long lightning rod.

The Guardian described the film as a “political broadcast for the payday party.” Ed Miliband, the leader of the opposition Labour Party, criticized the Wonga economy, in which, he said, thousands of British families were mired in unpayable debt.

Among technology buffs, Wonga has often been praised for its digital expertise. The company was established by Mr. Damelin and a fellow South African, Jonty Hurwitz, an artist and entrepreneur.