The proposed changes are relatively minor (such as a prohibition on making a new loan until seven days have passed since the borrower repaid their last loan), and these new recommendations follow already enacted changes reducing the amount a payday lender can charge on a loan (from $21 per $100 borrowed last year to $18 per $100 borrowed this year).
Payday loans are a problem, because as all astute readers will have already surmised, "$18 on a hundred" isn't as good as it sounds. If you borrow and repay every two weeks, it is the equivalent of an annual interest rate of 468%. How does that impact borrowers?
The payday loan data from our Joe Debtor study shows that:
- 1 in 4 (25%) people who file a bankruptcy or consumer proposal owe money on a payday loan (up from 18% two years ago);
- They have 3.4 payday loans with a total outstanding of just under $3,000 (up 9% from 2 years ago);
- They owe 121% of their monthly take home pay in payday loans; and
- Payday loans make up 9% of payday loan borrower's total unsecured debt of $34,255.
These numbers prove that payday loans are a problem. If you have to repay your payday loans from your next paycheque, but you owe 121% of your monthly income, how can you possibly hope to ever pay them off?
There is a perception that it's only low income people who get payday loans, but in our study, over two thirds (68%) of payday loan borrowers have a household monthly net income of over $2,000, and those earning over $4,000 had the most loans (3.8 on average).
Will making a borrower wait seven days before getting a loan solve the problem? No, because borrowers have many payday lenders to shop from, so if Payday Lender A won't give them a loan, Payday Lender B will. Even if the Ontario government were to pass a law to prohibit multiple loans from multiple sources it would be unenforceable, because there are online lenders operating outside of the reach of the Ontario government.
The statistics tell the real problem: excessive debt. "Only" 9% of a payday loan borrower's total debt is payday loans; they owe $2,997 on payday loans, but $34,255 in total, so that means they owe $31,258 on credit cards, bank loans, and other unsecured debt. The problem is not that a payday loan borrower doesn't have access to other forms of credit. The problem is that they are maxed out, and believe that they have no other choice but to get a payday loan.
So what's the solution? My firm, Hoyes, Michalos & Associates, made a submission to the Standing Committee where we made three simple, easy to implement recommendations:
- Require payday loan lenders to advertise the annual percentage rate (like 468%), not the more deceptive "18 on a hundred";
- Report all short-term loans to the credit bureaus, so that lenders know the extent of the borrowing, but also so that borrowers who do pay off their loans get a positive bump in their credit score, which may then allow them to qualify for more conventional forms of borrowing, at better rates; and
- Discontinue the use of low introductory "teaser" rates that only serve to encourage short-term borrowing.
Can the government solve the payday loan problem? I doubt it. Every rule the government makes can be circumvented.
The lasting solution is for consumers to understand the high rates they are paying, and to understand their options for avoiding payday loans. The solution is entirely in the hands of the borrower.
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