I met Ben and Sherry when I was facilitating a focus group discussion in Winnipeg with consumers who use payday loans. A payday loan is the borrowing of a small amount of money (up to $1,500) that must be repaid in a short time frame and carries a hefty fee. Payday lenders often have small store fronts in urban centres, frequently in economically depressed neighbourhoods, with signs advertising "fast cash" or "cash advance." Some offer their services over the Internet.
Payday loans are contentious: they are expensive and their actual interest rate is often difficult to discern.
Even where payday loans fees are capped by government regulations (in all provinces except Newfoundland and Labrador and Quebec), the rates are still alarmingly high. If you borrow $100, for example, the payday lenders can charge between a $15 to $21 fee (the general range across the country). At first glance, this sounds not too bad, like the 15 to 20 per cent interest rates of most major credit cards. But take a closer look.
The $15 to $21 charged per $100 borrowed is not an annual interest rate but a fee for a two-week loan. This means payday loans operate at a whopping annual interest rate of between 456 to 639 per cent. For some borrowers, this is where the trouble begins.
Such interest rates are dramatically higher than interest charges on mainstream bank credit products. So, who would bother to use them and why?
Groups working to reduce poverty in Canada have been sounding the alarm on payday lending for years, with good cause.
At my focus group, Ben told me he regularly took out two or three payday loans per year and did so strategically to cover unforeseen expenses. Ben could be the poster child for the payday loan industry since he uses payday loans in the way the industry claims they are designed -- as a convenience for the short-term to help bridge finances between pay cycles. But, sadly, Ben's experience is not the norm.
I also met Sherry. She has relied on payday loans for many years and found herself caught in a "debt trap." She claimed her personal record was using 10 different payday lenders at a time. She found herself borrowing from one payday lender to pay off the loan with another. When she could no longer get payday loans, her spouse began to do so.
Sherry's financial needs were not met through payday loans, but made worse by them -- and, as a result, she and her family were caught in a long-term cycle of debt from which they could not escape. What Sherry needed was a change in practice (more income and/or less spending) and a longer-term credit product with minimal rates that could be repaid in installments and help build her credit record in the process.
Unfortunately, Sherry's form of repeat payday loan borrowing is common and it can sink families into poverty.
A Pew Charitable Trust study argues that repeat borrowing among U.S. payday loan clients is the norm and another study found that one-fifth of California borrowers take out 15 or more loans in a 1.5 year period.
In case we are left thinking this is an American problem, research I was involved with examined Canadian consumer experiences with payday loans and found repeat borrowing is a problem in Canada, too. Data from British Columbia shows that the average number of loans per payday borrower in 2014 was 4.3 and the number of people taking out 15 loans or more had increased by one-third. In Nova Scotia, in a one year period, 40 per cent of loans were from repeat borrowers and 22.3 per cent of borrowers took out eight or more loans.
Groups working to reduce poverty in Canada have been sounding the alarm on payday lending for years, with good cause. So, what can be done?
When the Trudeau government took federal office almost a year ago now, they expressed a commitment to create a Canadian Poverty Reduction Strategy. Revisiting the regulations surrounding payday loans should be on the agenda.
It is time for the federal government and the big banks to step into the breach that payday lenders have filled. Consider the example set by Vancity Credit Union with its Fair and Fast Loan. The loan is available to their B.C. members, has flexible terms (from two to 24 months for borrowing up to $2,500), with an annual interest charge of 19 per cent, not 639 per cent.
The Financial Consumer Agency of Canada recently undertook their own study of payday lending patterns and they will be reporting soon. What they find could form an opportunity for the federal government to make good on their promise of tackling poverty in Canada -- and begin the necessary work of more stringently regulating this contentious industry.
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