I was on my way to present at a conference about the lack of savings culture in South Africa when I first received a press release about Wonga.com. According to their release you could borrow money in six minutes. Six minutes to get a loan!  This was great content for my talk and I used it as an example of what was wrong with our savings industry – it takes less than ten minutes to borrow money but hours if not days to open a savings account which requires masses of paperwork to prove you are not an international money launder.

So I feel a bit conflicted writing about Wonga.com in my column. I don’t like personal loans; I don’t write about them nor promote them. In a perfect world personal loans are there to help someone out with a crisis when they need cash in an emergency; in our imperfect world personal loans have turned into an addiction where our entire society does not believe they can live without credit.

So for me Wonga.com peddles a drug, but I also realise that there are “clean” drugs and there are “dirty” drugs and at the very least Wonga is completely transparent about what it costs to borrow from them and if CEO Kevin Hurwitz is to be believed, they do not lend recklessly.

The first thing Hurwitz told me was that when they launched they only approved 15 out of every 100 applications. As their systems improved and they were able to source better data, the approval rate increased to 35 out of 100 loan applications. Unlike most banks, Wonga.com’s money comes from its owners and they don’t want to lose their money by lending recklessly.

In contrast African Bank stated last week that even in this market, where consumers are up to their eye balls in debt, it is approving 68 out of every 100 applications (down from a peak of 80). Considering that 49% of credit active South Africans are indebted according to the National Credit Regulator, I wonder where exactly African Bank is finding these 68% of applicants that can afford its loans?

Hurwitz says what Wonga.com does differently is mine data, lots of it, to see if the applicant can afford to repay the loan. They trawl credit records and payment histories. They have computer programmes that work on certain parameters and based on those rules the loan is either accepted or rejected.

Machines can be an advantage over the personal interactions as it removes the temptation for a consultant to approve a loan or “adjust” information on the application in order to meet their quotas and earn their commission. Bank consultants are shameless in how much they push personal loans onto customers. A friend related a story of walking into a bank branch where a sales consultant offered her a “once-off” loan. She declined and was told “you should take it now because it may not be available when you need it”. Consultants use fear to sell their products while machines are not driven by commissions.

Wonga.com only offers low-value, one-month loans – in the US these are known as pay cheque loans. First time clients only qualify for a maximum R2 500 loan which has to be paid back the following month in full with interest. As these are one month loans Wonga.com is able to charge maximum interest which works out at 5% a month or 60% a year. They also charge the maximum initiation and service fees as allowed by the National Credit Act. So on a R2 000 loan you will pay R445.95 in fees and interest over one month – that is 23% a month!  It is not cheap but it is honest.

The site allows you to select the amount you want to borrow and the length of time to repay it (up to a maximum of 45 days) and immediately tells you have much interest and fees you will pay as well as the total amount that you will be expected to pay. If you still want to go ahead and borrow the money, at least you know what you are in for.

The major risk is that the customer turns this into a revolving facility; continuously borrowing each month to make ends meet. They would clock up 270% in costs over a year, or put another way, if a customer kept borrowing R2 000 a month, they would spend R5 472 a year just on interest and fees.

Hurwitz says this is something they avoid as it does not build a sustainable business as eventually the customer will be unable to meet the repayments. They prefer to keep the amount of times a customer borrows from them down to three to six times a year. Even at that rate though, the customer is paying a hefty amount for borrowing.