Controversial payday lender Wonga is trialling longer loans with online retailer the Cotswold Company
Controversial payday loans firm Wonga is taking on the credit card industry with a product that allows shoppers to pay for goods with a three-month loan.
The firm claims that its PayLater service “is a credible and innovative alternative to credit cards enabling people to spread the cost of online shopping but in a short-term and controlled way”.
Instead of paying with a debit or credit card for online purchases, shoppers can use PayLater and spread their purchase over three months for a one-off fee of 7% of the purchase price. The fee is paid when the order is placed, so a £100 purchase would cost consumers £7 upfront, plus three repayments of £33.33.
“[The] PayLater service is another example of the power of technology and data when applied to finance,” Wonga said in a statement. It is piloting the service with a single retailer – furniture company Cotswold – on orders of £100-£1,000.
If shoppers cancel an order within 14 days, they will receive a full refund of the 7% finance fee. A partial refund may be given if orders are cancelled after 14 days.
The annual percentage rate (APR) on Wonga’s PayLater service is 27.7% – significantly lower than the 4,214% APR it levies on its payday loans.
However, Andrew Hagger of Moneycomms.co.uk said the new service did not compare well with credit cards. “If you were to pay for £100 worth of goods on a credit card with a typical APR of 18% and pay off £33.33 a month over three months, you’d end up paying about £3 in interest,” he explained.
“This makes Wonga’s PayLater service more than twice as expensive. However, it might appeal to some people who like the simplicity and transparency of it.”
Wonga payday loan customers borrowing £100 over 45 days (the current maximum loan period) would pay a total of £52.32 in interest.
Wonga would not comment on who it is hoping to attract with the new service or how payments will be taken from borrowers, but most payday lenders use the controversial continuous payment authority (CPA) method to extract repayments.
CPA allows a lender to take a series of payments using a customer’s debit card or credit card without having to seek permission for every payment. The Office of Fair Trading has recently had to issue guidelines for how companies should use CPA following reports of some traders not making it clear to customers that they are being signed up to a CPA, or about their rights to cancel.
A spokeswoman for Cotswold said: “After trialling several finance options in the past we have decided to trial PayLater. Their service is totally transparent, and totally optional. As it’s a three-month finance option it is a cost effective alternative to using a credit card, which is especially useful at this time of year. Customer uptake so far has been slow, however the trial is still in its infancy.
“We have a fantastic relationship with our customers, so intend to listen to their feedback over the next few months and decide whether they find this option useful.”