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Wonga charges up to 1000% interest rates

And that’s the good news.

Image: Blacklist and payday loans for low income earners

Payday loan provider cashes in on what Stuart Theobald calls the problem of intertemporal choice: having money now looks like a better idea than having to pay it back after a month with interest. Psychologically we are wired to want the best now and plan for the future when it happens.

Isn’t that true for all things in life? Unless we are burnt we think the fire is too far in the distance. The same goes for planning ahead: we think we can spend now and save later, but changing your spending habits requires dedication. You might think you will have this dedication when you’re sitting with the money in your hand, but come next month and you’re further in debt than before.

Theobald thinks, however, that even though Wonga charges hefty interest rates (which they say are more handling fees than interest rates), they are transparent about the costs and therefore more trustworthy than lenders who come up with all kinds of surprize costs 30 days later. But can consumers make the best choice for their financial future even if they have the costs in front of them?

That’s where the problem with intertemporal choice comes in. We simply aren’t wired to see amounts in perspective when they will be charged in the future. That’s also why credit cards are so dangerous. The psychology between lending and the debt trap is fascinating, but how does this help consumers?

Well, firstly, don’t take out payday loans. That seems to be the pretty straight-forward answer. If you have to take out a payday loan, make sure you can afford it and that you won’t, under any circumstances, need to take out another payday loan a month or two down the line. That is where it gets tricky and why Wonga has a limit on only lending one consumer six amounts per year: living pay check to pay check can turn into living payday loan to pay check to pay day loan to over indebted.