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Low value-high interest “payday” and similar loans are used by a large number of low-income Canadians as they fall behind on bills or have an emergency pop up. Storefront payday lenders (now more numerous than McDonalds restaurants or RBC branches) are being joined by numerous online lenders. Unfortunately, the increase in ‘competition’ among payday lenders hasn’t resulted in interest rates going down as they vie for business while consumer indebtedness to this high-cost credit has risen sharply. This has led to the Ontario Government starting a review of the Ontario Payday Loans Act, 2008.
PIAC has been looking into the payday loan industry since the early 2000’s, and has submitted its suggestions to the Ontario government for this review process. We hope the review results in meaningful changes.
“There are two big problems with payday loan companies. Their rate is very high and the entire amount that you borrow is generally due within 2 or 3 weeks. When a loan is high cost and is due in full on the next payday – not paid off over time like a standard loan – it will cause the people who took the loan in the first place to be unable to meet other obligations,” John Lawford, PIAC’s Executive Director points out. “Maybe they can go 2 to 3 weeks without having to take another loan, but they will be short again soon because their other obligations go on and it will keep perpetuating. People who take payday loans tend to take around 10-12 in a year. That pattern of repeat borrowing is where profit is made by the industry. That’s not responsible lending.”
With rates that don’t seem to move with competition, high availability, and some degree of borrower desperation, those who need to borrow some money to get by end up falling into a virtual debtor’s prison from which it is difficult to escape. Many Canadians who should get credit counseling or debt repayment schedules or even debt forgiveness (whether through insolvency or charity) are instead being propped up longer by payday loans and finding themselves deeper and deeper in debt.
Some places have already made drastic moves against the payday loan industry: New York effectively has made them illegal by stipulating an interest rate cap below 30% annually. There’s an argument that in areas like that, those who need money fast will turn to illegal loans, but Lawford says that’s not the case.
“There’s no evidence people automatically turn to illegal lenders or even that that’s that much of the market right now. In the places where people have banned the industry or reduced it, it appears that people just don’t take loans,” Lawford said. “It’s hard to say why with the current data, but it’s not true that it automatically turns into an equal volume of illegal loans. That suggests to me that, for whatever reason, the way the payday loan product is structured now is convenient and easy and it may mask the harder but probably better way of getting out of debt.”
Canadians need a fair solution to the problems payday loans present. A solution that makes lending available, but not a life sentence in debt.
“PIAC would like to see a review board for the maximum rate of borrowing,” stated Jonathan Bishop, Research Analyst for PIAC. “It should be placed in a public utilities-like board, a publicly funded board that takes in evidence from all stakeholders when determining what that rate should be. It’s clear that the market will not take care of lowering that maximum rate of borrowing. Competition has not lowered it. Every time a provincial jurisdiction has set a rate, most of the players in that marketplace have kept the rate pretty much at the maximum. Which demonstrates to us that competition isn’t working the way it would in other markets.”
PIAC is hoping to see Ontario’s provincial legislation in place to make the payday loan business model more consumer-friendly by Spring of next year. Alberta recently has announced a review of the industry. Other provinces wishing to protect the borrowing public should follow suit.