As members of the American workforce look for ways to take control of their finances and whittle their way out of debt, some new services have made getting short-term loans so easy that they could cause the next credit crisis. 

Last week I wrote about the concept of “Positive Cash Flow” and how focusing on this simple goal can bring in new income and help you pay off debt. If you’re having a hard time maintaining positive cash flow, short-term loan services such as BillFloat and Wonga are other services meant to help those living paycheck-to-paycheck.

BillFloat and Wonga: The Basics

Though comparable, the two services do take slightly different approaches. BillFloat offers advance loans in order to help you pay your bills on time. To receive the loan, you choose the company you plan to pay (Time Warner, Verizon, National Grid) and provide your account information for that particular service.

Wonga, which is based in England and not currently available in the U.S., hands over cash more directly. Wonga provides an extremely simple interface that allows you to select how much cash you need and how long you’ll need to repay it.

The services cap loans between $650 and $1,000 and do not offer loans longer than 31 days. These limits mean the services act more like payday loans then short-term loans. BillFloat CEO Ryan Gilbert said his service complies with terms of the FDIC’s small-dollar loan template and that the company reviews a number of factors before issuing loans, such as: (1) Do the borrowers have a decent relationship with the biller? (2) How has the borrower interacted with their bank in recent months? Have they bounced a lot of checks, for instance? and (3) Are the borrowers really who they say they are? Additionally, the most a first-time borrower can receive is $225.

From a design and user experience standpoint, I do have to give a nod to Wonga. The service’s mobile application is sleek, sexy and scarily easy to use. A couple swipes of some nicely designed sliders, a quick input of your information, and within an hour, your pockets have been refilled. It is actually that easy!

Risk vs. Reward

Even with this level of oversight, should consumers with obvious money issues be allowed to take out small loans? After all, these loans could potentially harm a consumer more than they would help. As a consumer in need, should you use a service like this if you’re having a hard time paying your bills each month?

For me, the quick and easier answer is NO. While these loans do not compare to sub-prime mortgages in terms of size, both BillFloat and Wonga will turn to collection agencies to collect outstanding fees if you fail to pay back the loan. This alone could hurt your credit, while paying the loan back responsibly won’t do much to help your credit.

To see how much a consumer would owe over a 30-day period when using one of these services, I ran a quick test. Borrowing $225 would cost you $14.06 in interest and service fees with BillFloat at a monthly interest rate of 3%. With Wonga, the same loan would result in a $48.85 cost at a staggering 21.5% interest rate. These fees are on par with, or in some cases higher than, standard bank overdraft fees. Maintaining an account with an online bank might save you some money, even if you overdraft. Some institutions, such as ING Direct, actually treat their overdraft fee as a short-term loan. When running the same test, I actually found ING DIRECT would only charge me $1.34, or 0.006%.

The results from my test highlight the one demographic these services really target, the underbanked. These two companies target consumers who clearly have issues with money management and need a little extra cash to pay bills or make purchases they can’t or shouldn’t be making.

While my opening statement about these services’ ability to trigger the next credit crisis is probably a little harsh, there’s no denying that these sites are providing seemingly “easy money” for those who should be budgeting, not spending. Though I give credit to both companies for their innovation and transparency, offering an easy way to access money that puts consumers further into debt is definitely a step in the wrong direction. Personally, I am going to focus on building a budget and generating positive cash flow.

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  • Peter Mansfield

    Many thanks for your coverage of BillFloat. You have some excellent observations, and clearly understand the dilemmas facing consumers very well. Looks like we may not have done a good enough job of explaining how we are very different from Wonga etc. As an example, we don’t use collections agencies. A crucial point for us.
    We can ease most of your fears, and show you that we really are on the consumer’s side!


      Hey Peter, thanks for thanking the time to leave a comment and correcting the section on collection agencies. Though I agree your mission is to help consumers make payments on time. Consumers need to consider their lifestyle and money habits before taking on more debt when jumping to products such as yours. – Thanks

  • John

    Hi Alex. You make some fair points, but there are some things you’ve implied about Wonga that I would like to set the record straight about…

    Firstly, you suggest our limits on loan size and amount make us more like a payday loan than a short-term loan. Yet, as you later explain, we use our sliders to allow applicants to pick exactly how much they want to borrow and how many days they need it for, which can be anything between 1-31 days. With daily interest, the full cost is calculated very clearly and according to each applicant’s needs. There are no set amounts or set fees, common in payday lending.

    No-one is forced to borrow a set amount or indeed repay on their payday. You do need to be employed, but we have reinvented the short-term lending model to offer far more flexibility, as well speed and convenience. Even early repayment is available at any time with no catches. We actually encourage it. As for pricing, a typical two-week loan would come with actual interest of around 14% – for money which is made available instantly and around the clock. Certainly the unauthorised bank overdraft charges in the UK run up to £10 per day, with interest on top.

    Whatever, your views on value, we make it very easy for consumers to make a judgement call on what they’ll be asked to pay and there are no hidden tricks.

    We’re glad you think our mobile app is easy to use, even if you feel that’s a negative. We’d argue that a simple, transparent and easy interface is what’s badly needed in the financial world! Furthermore, the simplicity and speed we provide are only made possible because of the robust decision technology we have spent three years developing. We require around 30 pieces of data from a first-time applicant, but we then add several thousands of additional data points, in real-time, and our complex back-end systems are not only objective, but proven to be accurate.

    You state we’re targeting the underbanked, but nothing could be further from the truth. The basic requirements for a Wonga loan are 18+, a regular income, full banking services, internet access and a mobile. But that’s just the start and we work with the major credit bureas – using the automated systems I have described – to make highly selective lending decisions. On an average day it’s not unusual for us to decline 4 out of 5 first-time applicants and our customers who are accepted typically earn average national wage, are web-savvy and tell us they actively choose to use Wonga or traditional credit alternatives. They value the speed, flexibility and transparency we provide – something they can’t get from a bank.

    Finally, you state that paying the loan back responsibly won’t do much to help your credit, but the opposite is true. Wonga works with the major UK credit bureaus and all good repayments are reported accordingly. Sure, this means that prolonged non-payment can be reported too, but this clearly explained and would only happen if our professional, in-house collections team (NOT agencies as you suggest) was unable to reach a fair solution with a customer.

  • John

    Hi, my comment doesn’t seem to have been approved? No problem if you’ve just been busy, but otherwise it seems unfair when there are several misleading assumptions stated about Wonga. Cheers


      Hey John, we are unable to find the early comment you made. I’ll email you directly to make sure your first comment is added. – Thanks

  • Elaine Zimmermann

    BilFloat seems to be needed concept in this tough economy.