Recently the Ontario government asked for comments on potential reductions in the maximum total cost of borrowing a payday loan in Ontario. In particular, the Ministry was recommending that the cost be reduced from the current $21 per $100 advanced, to either $15 per $100, $17 per $100 or $19 per $100.
Obviously, the lower the cost, the better for the consumer. A recent Hoyes Michalos / Harris Poll study commissioned by our firm confirmed that the average amount owing on payday loans received by those who took out a payday loan in the past 12 months in Ontario was $1,849. More than half (55 per cent) took out more than one payday loan in the past 12 months, so reducing the interest rate will save these individuals money.
Here's the problem: saving a little on a payday loan is not going to solve the underlying problem of why borrowers turn to payday loans in the first place: other debt.
If we truly want to keep people from becoming trapped in a payday loan debt cycle, we need solutions that address the underlying issue that taking on more debt is just too easy.
This same Hoyes Michalos / Harris Poll study revealed that 83 per cent of payday loan users in Ontario carried other debt at the time they took out a payday loan. Almost half (48 per cent) agreed that they sought a payday loan because of the amount of other debt they carry, and 46 per cent of those who used a payday loan in the past 12 months agreed they took out a loan to keep up with their debt repayments. In addition, almost three in four payday loan users in Ontario (72 per cent) explored other lending sources at the time they took out their last payday/short term loan.
When you are carrying excessive debt, have maxed out your credit cards and other lower cost borrowing options and need money to make your next debt payment (or buy groceries because your debt payment used up all of your paycheque), you don't really consider the implications of whether you are paying $21, $19, $17 or $15 per $100 payday loan advance.
If we truly want to keep people from becoming trapped in a payday loan debt cycle, we need solutions that address the underlying issue that taking on more debt is just too easy. With that in mind, in our submission to the government of Ontario we recommended the following changes to payday loan legislation:
- The requirement that payday loans be stated in terms of APR, not as a dollar per100 advanced. Understanding that a payday loan can cost 546 per cent per annum, compared to a credit card advance of 29 per cent may help some make better borrowing choices.
- All payday loan advances should be reported to the respective credit bureaus. Having these loans appear on a credit report serves two purposes: it requires payday lenders to consider financial capacity before issuing a loan and may stop individuals from taking out multiple loans from multiple payday loan companies. In addition, positive repayment would provide evidence of good credit history which could help borrowers improve their credit score and move them towards qualifying for better, lower cost, borrowing options.
- Teaser or introductory rates should also be banned as these are just another way payday lenders trap users into becoming repeat borrowers.
Payday loans are not the best borrowing option. Any changes to the current legislation have to help consumers make better decisions, not just tweak the cost.
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