Digital bank Monzo is dipping its toes into the short-term loan market a year after Wonga collapsed, but insists it won’t target customers who usually turn to payday lenders.
The challenger bank officially launched loans for its 2.5 million customers on Thursday, after a trial with around 4,000 of its users. Those who qualify will be able to borrow up to £15,000 for up to 60 months, or take out loans as small as £200 for just 90 days.
This type of wage supplement has been the hallmark of short-term or payday lenders, whose customers borrow an average of £300 over three months.
But while payday lenders typically hit customers with interest charges equal to an annual percentage rate (APR) of 1,000%, Monzo charges a maximum APR of 24% on loans up to £7,500. Loans worth between £7,500 and £15,000 are charged at a rate as low as 3.7% APR.
Founder and chief executive Tom Blomfield said Monzo, which is favored by younger customers, particularly in the southeast, is not trying to please those with low credit ratings. “These don’t target the subprime end of the market at all. You must pass a relatively strict credit check.
Last year told the Telegraph that Monzo was planning to launch loans targeting “the Wonga segment” of the market. He said he didn’t want to expand into this area just for profit and suggested there could be a more ethical approach to payday loans.
He was forced to come back to these comments and a few days later he said that Monzo was “categorically not working on a high cost credit product”. But he said helping people struggling with mounting debt and poor credit scores was an area the company still plans to move into.
Blomfield said Monzo’s new small 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 dive into costly 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 in value to £2bn after closing another round of investor funding. The bank has raised £113m from a group of investors led by Y Combinatora US-based investment firm known for backing vacation rental platform Airbnb, file hosting service Dropbox and online forum Reddit.
