02/18/2016 02:32 EST | Updated 02/18/2017 05:12 EST

Only You Can Solve The Payday Loan Problem

Perry Mastrovito via Getty Images
Stack of ten thousand dollars in Canadian one hundred dollar currency

Payday loan companies in Ontario can charge a maximum of $21 on every $100 borrowed. That may not sound like a lot, but if you take out that loan every two weeks, for a year, you will have paid $546, which is an annual interest rate of 546 per cent. That's a lot higher than even the highest credit card interest rate.

But so what?

It's a free country. If you want to get a payday loan, why should anyone stop you?

In Ontario, and most provinces in Canada, we have laws designed to protect consumers. Payday loan companies are required to disclose the full cost of the loan, and they are not permitted to allow you to "cycle" a loan, so you can't keep re-borrowing today to pay off last week's loan.

Are these rules sufficient, or do consumers require even more protection?

Informed consumers don't require any protection. If you understand that you are paying 546 per cent interest, and after careful consideration you decide to take out a 546 per cent loan, so be it.

The problem is that many consumers are not fully informed. They think "20 bucks on a hundred, that's not so bad," not realizing that interest is calculated annually, not every two weeks.

If we forced every payday loan company out of business, what would happen?

Many consumers don't realize they have other options. They think "my rent is due on the 1st of the month, and I don't get paid until the 5th, so my only option is to get a payday loan." Wrong. There are many options, starting with talking to your landlord and explaining that your rent will be five days late (but it will never happen again, because you are going to start setting aside the money earlier in the month). I'm not a lawyer, but I don't believe it's legal to evict a tenant for being five days late with rent.

If you need a loan until payday, and you then use your paycheque to pay back that loan, how will you live until your next payday? You get another loan, and the vicious cycle begins. In our recent Joe Debtor study we discovered that the average person who goes bankrupt who has a payday loan at the time of bankruptcy has an average of 3.5 loans at the time of filing.

Not one loan. More than three. That's a cycle that is almost impossible to break, and, for many, bankruptcy becomes the only solution.

So what's the solution? More government regulation for payday loan companies?

Here's a shocker for you: I've never believed that more government is the solution to our problems. If we forced every payday loan company out of business, what would happen? Would desperate borrowers just stop borrowing?

I don't have a crystal ball, but if I had to guess I'd say that would simply push people to internet lenders, who are very difficult to regulate. How can the provincial or federal government regulate a lender in the United States, or any other country? The internet is a big place, and once they are online there may be no consumer protection.

Would a payday loan registry help, so that you couldn't get a payday loan if you had a loan with another payday loan company in the last month? That may help, but again it may only serve to drive people to less reputable lenders.

There is only one person who can solve this problem: you.

Only you can understand the costs of a payday loan, and the alternatives, and only you can decide to seek other alternatives. You are the only solution.

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