Payday lending – Helpful or harmful?

• In June 2016, Alberta passed a by-law requiring payday lenders to provide borrowers with debt and money management resources, stipulating that failure to do so will result in a $1,000 fine.

• In June 2016, National advocacy group ACORN representing middle and lower-income residents issued a statement for the British Columbia government to clamp down on payday lending practices in the province.

• In May 2016 Google announced that effective July 13th they will no longer advertise for payday lenders that issue loans within a 60 day period with interest rates of 36 per cent or higher.

• In April 2016, the Ontario government issued a report on payday lenders proposing the borrowing rate be reduced.

1. Borrowers are forced to pay unfair interest rates. Whenever you request a payday loan, you must repay the loan on your next pay day. Whether you borrow $300 for a period of seven days or 28 days, you are obliged to pay the same interest cost of $63. So one borrower might pay 21 per cent weekly interest while another ends up paying 5.25 per cent weekly interest. 

2. Payday lenders do not help customers build their credit. Payday lenders issue loans without a credit check. Credit checks are used to measure your ability to repay the loan you are issued. People with poor credit scores have fewer options for borrowing and are therefore more prone to resorting to a payday lender. In fact, individuals who have been declined a credit card are 3.6 times more likely to resort to a payday lender (1). Since payday lenders do not report borrower compliance to the credit bureaus their customers cannot build credit or improve their credit score. As a result, they remain ineligible for cheaper and safer loans such as a line of credit. 

3. Payday lenders target people living on low incomes often leading them into a cycle of debt and dependency. Fifty per cent of payday users fall within the bottom 20 per cent of net-worth distribution in Canada (1). According to the 2005 Survey of Financial Security conducted by Statistics Canada, “households with less than $500 in the bank were 2.6 times more likely to have used a payday lending service than those with over $2,000 in the bank”(1). Many payday users are on a tight budget living from paycheque to paycheque and can’t afford the $63 interest cost of borrowing from payday lenders. This leaves them short at the end of the month requiring another loan to be taken out to meet their expenses and the costs associated with the first loan. That is where consumers fall into a debt cycle. 

4. Failure to repay your payday loan can have disastrous consequences. If you cannot repay your borrowed loan on your next pay day, you are subject to a penalty fee which ranges from $25 in Ontario to $40 in Nova Scotia (2). Let us look at one example of a British Columbian who decides to borrow $300. They will be charged the borrowing cost of $69, however missing their repayment on the agreed upon date would subject them to a penalty fee of $20. This hikes their debt to the lender up to $389 ($300 + $69 + $20). The $389 is then subject to an additional annual interest rate of 60 per cent - the maximum allowable rate by Canadian federal law.