Most people know that they should avoid payday loans, for one simple reason: The cost is very high. In Ontario a payday lender can charge up to $21 on each $100 borrowed, so if you get a loan until your next payday in two weeks, and do that 26 times in a year, you end up paying the equivalent of an annual interest rate of 546%.
In an attempt to make payday loans less predatory, the Ontario government just announced that effective January 1, 2017 the maximum allowable cost of borrowing will be reduced to $18 for each $100 borrowed, with a further reduction to $15 on each $100 in 2018.
While I assume these changes are an honest attempt to help the consumer, the Ontario government misses the point. The problem is not the high cost of payday loans; the problem is that borrowers have so much other debt that they feel they have no choice but to turn to payday loans for relief.
In a recent survey we discovered that, for Ontario residents, 83% of payday loan users had other outstanding loans at the time of their last payday loan, and 72% of payday loan users explored a loan from another source at the time they took out a payday/short term loan. The majority of payday loan borrowers didn't want a high interest loan: they got one because they believed they had no other choice.
Lowering the cost of payday loans will not solve the underlying problem of too much other debt. So what's the solution?
Obviously we should all do our best to live within our means and pay off our other debt, but if you have lost your job, or had a medical issue, or have gone through a divorce you may have more debt than you can handle, which is why an increasing number of Canadians are turning to solutions like a consumer proposal.
What should the Ontario government have done to help address the specific problem of payday loans?
In my letter to the government back in May I made three low cost, easy to implement recommendations:
- Require payday lenders to advertise the actual annual percentage interest rate (like 546%), because that's easier to understand, and scarier, than "21 on a hundred."
- Require payday lenders to report to credit bureaus. This would reduce the chance that overextended Ontarians take out multiple loans, a real issue we see daily. It would also reward Ontarians who do repay their loan on time with an improved credit score, allowing them to eventually qualify for credit at lower interest rates at traditional lenders.
- Prohibit 'low introductory rates' to remove the temptation for Ontarians considering a payday loan to be trapped in the payday loan cycle in the first place.
Instead of implementing recommendations that could have positively impacted consumers, the Ontario Government chose simply to lower the interest rate from the current $21 per $100 borrowed to $15 in 2018 -- an amount still equal to an appalling annualized rate of 390% if you borrow for a two-week period (and even more expensive if the loan period is shorter).
On it's face, this looks like a 'win' for the borrower. But there will be repercussions that will ultimately harm those who are forced to rely on payday loans for credit.
Lower profit margins may force some lenders out of business, driving the business, and borrowers, online or underground. The online lender space is already expanding rapidly. Ease of access will only increase the demand for payday or quick cash style loans. There is also a risk that off-shore sites will be beyond the reach of the Ontario government to control and regulate, making these products far riskier than those currently offered in brick-and-mortar payday loan locations.
Regulating an industry out of business will not decrease demand for the product. There will always be some demand for a short term loan like a payday loan. Instead of forcing it underground, in spaces we cannot regulate, we should be facilitating better payday loan products and reasonable alternatives.
Instead of encouraging thoughtful discussions and recommendations by asking an open question (like "what can we do to fix the payday loan industry?"), the Ontario government instead chose to consult with Ontarians by asking a leading question ("by how much should we reduce the cost of borrowing?"), with their answer already prepared in advance. The end result is a miserable failure to improve the payday loan industry, continuing to leave vulnerable Ontarians exposed to expensive loans.
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