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Digital bank Monzo is dipping its toes into the short-term loans market a year after Wonga’s collapse, but insists it will not target customers who usually turn to payday lenders.
The challenger bank formally launched loans for its 2.5 million customers on Thursday, following a trial with around 4,000 of its users. Those who qualify will be able to borrow as much as £15,000 for up to 60 months, or take loans as small as £200 for as little as 90 days.
That kind of wage top-up has been the hallmark of short-term or payday lenders, whose customers borrow an average of £300 over three months.
But while payday lenders usually hit customers with interest charges equal to an annual percentage rate (APR) of 1,000%, Monzo is charging a maximum 20.4% APR on loans up to £7,500. Loans worth between £7,500 and £15,000 are charged as low as 3.7% APR.
Founder and chief executive Tom Blomfield said Monzo, which is favoured by young customers especially in the south-east, is not trying to appeal to those with low credit scores. “These aren’t targeted at the sub-prime end of the market at all. You have to pass a relatively stringent credit check.”
Last year Blomfield told the Telegraph that Monzo was considering launching loans targeting “the Wonga segment” of the market. He said he didn’t want to expand into that area solely for profit, and suggested there could be a more ethical approach to payday loans.
He was forced to backtrack on those comments and days later said Monzo was “categorically not working on a high-cost credit product.” But he said that helping people with spiralling debt and poor credit scores was an area the company still planned to move into.
Blomfield explained Monzo’s new smaller loans will appeal to customers who, for example, need an emergency boiler repair but don’t want to charge it to their existing credit card or dip into expensive overdrafts.
“I don’t think you should force people to borrow thousands of pounds if they don’t need thousands of pounds. They just need £200 for a short-term need for three months and it’s a flexible tool. I don’t think it’s for everyone.”
Monzo recently doubled its value to £2bn after closing a fresh round of investor funding. The bank raised £113m from a group of investors led by Y Combinator, a US-based investment firm best known for backing holiday letting platform Airbnb, file hosting service Dropbox and online forum Reddit.
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