Wonga, the online loans company, is facing questions about whether its checks to prevent children from borrowing cash are adequate following evidence that it has allowed under 18s to build up debts.
Wonga has faced widespread criticism over its interest rates, allegedly heavy-handed debt collection methods
By Jason Lewis, Investigations Editor8:00AM BST 14 Oct 2012175 Comments
It is the high-interest loans company which came from nowhere to become one of the fastest growing finance firms in Britain.
Wonga has faced widespread criticism over its interest rates, allegedly heavy-handed debt collection methods and, most recently, its £24 million shirt sponsorship deal Newcastle United football club, which some say will tempt impressionable young fans to get into debt.
Now Wonga.com is facing new concerns over evidence it has allowed children to borrow cash, getting themselves, their family, and friends into debt, because its checks to prevent them applying are an inadequate.
Under-18s are banned from taking out loans with the firm, and Wonga dismisses it as "fraud", but a Sunday Telegraph investigation suggests that young people are finding ways to convince Wonga’s "automated, real-time risk and decision system" that they are eligible for its 4,214 per cent APR loans.
The evidence includes:
* Cases of children who lied about their age and successfully applied for loans, building up large debts that they could not afford to repay;
* A debt relief charity says it detects a "worrying trend" with a growing number of children contacting them for help after asking 18-year old friends to take out short term loans on their behalf and then being unable to repay them;
* An MP is preparing a dossier of vulnerable young adults with learning difficulties and mental health issues who have got into debt with the firm.
Critics of Wonga, which earlier this month revealed net profits of £45.8 million for 2011, say its boast of providing cash to loan applicants within 15 minutes does not allow a sufficient "cooling off" period to think carefully about the loan they are taking out and whether they can afford it.
Wonga’s computer system checks whether applicants have a valid bank account – which can be opened by someone as young as 11 – an email address and a mobile phone number, to which it sends a unique PIN code. It also checks applicant’s addresses, asking for the surname of the "bill holder".
Applicants are also given the option of connecting through their Facebook account. Facebook users must be at least 13. "Connecting with Facebook", says Wonga, "helps us to know you better. This will improve your chances of being approved for a loan."
A leading businesswoman told The Sunday Telegraph that her son, who suffers from attention deficit-hyperactivity disorder (ADHD), ran up a series of debts using Wonga when he was 17.
She said: "He simply lied about his age and was able to borrow hundreds of pounds which he couldn’t afford to pay. Then debt collectors hired by Wonga came to us for the money plus interest."
Another parent said Wonga was pursuing them over loans taken out by their 17-year-old daughter on behalf of a friend, also 17. He said they did not find out until "Wonga emptied the bank account (she) uses for her education maintenance allowance and is now unable to get to college".
Wonga was set up by Israeli businessman Errol Damelin, 43, and South African Jonty Hurwitz, also 43, who helped design a mathematical model to allow the firm to issue the maximum number of loans in the shortest time possible at the minimum risk.
Rather than a bank or financial institution, Wonga is a technology firm with Mr Damelin’s ambition for it to be "world class", "like Facebook, Amazon and Apple".
The pair set up the firm in 2007, with Mr Damelin relying on his wife, Julie Blane, a marketing consultant, to cover the bills at their £580,000 East Finchley home while he paid himself just £400 a month as he built the business. By last year one of its directors, thought to be Mr Damelin, was earning £1.6 million.
The business centres on the sophisticated computer program, built by Mr Hurwitz and a team of software engineers.
The partners’ plan was simple, they would borrow from venture capitalists and issue small loans, for up to a month, to customers at a large profit.
They took out a mortgage on their computer model, repaying with an interest rate of between 7 and 12 per cent.
Although Wonga’s cost of borrowing is high – a loan of £400 for a month costs £125.48 in interest and fees – the company claims the traditional APR measure is not relevant to its short term lending.
The business took off, and has now issued more than five million loans, worth up to £1,000 each, with a maximum term of one month.
The business is helped by the lack of legislation in Britain on how much interest can be charged. Other countries, notably Australia and some US states, have placed strict caps on interest rates. Some US states have outlawed loans like Wonga’s completely.
In Britain, television advertising and Facebook marketing helped it go from a loss in 2009 to a strong operating profit.
However earlier this year the firm was criticised by the Office of Fair Trading, which warned it against letters or emails suggesting that customers may have committed fraud and telling them that Wonga would consider contacting the police.
A spokesman for the charity the Debt Advice Foundation said young people were contacting its advice line worried that they owe money to an older friend who had taken out a loan with payday companies, including Wonga, on their behalf and now finding they could not repay the debt.
She said it was evidence of a "worrying" culture change.
Stella Creasy, a Labour MP campaigning for tighter regulation of payday loans, said her office was compiling a dossier of young people who, though old enough to apply for credit, were not capable of making informed decisions and were getting into financial difficulties with the easy credit offered.
Mr Hurwitz now devotes more time to sculpture, a website of his ideas, which he calls "Binge Thinking", and a foundation for child refugees. He has a £2 million home in Haslemere, Surrey, with his wife, Oonagh.
Mr Damelin said careful checks were made to stop children obtaining loans. He said: "If somebody is using fraudulent information to get cash, and then not paying back, they are not the victim – we are the victim."
A Wonga spokesman said: "Like all online businesses, we are not 100 per cent immune to fraud, but it constitutes less than 0.1 per cent of all loans approved and we decline the majority of applications based on creditworthiness or ID-related issues."
She added that in cases of vulnerable adults getting into debt with the firm it had a "hardship team" to "manage these situations as sensitively and swiftly as possible".
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