May 22nd, 2007

 

Blurb: Both the Canadian and provincial governments are tightening regulations to curb some of the excesses in Canada’s booming payday loan industry. 

 

Payday loan providers come under the loop

 

Need a little cash to tide you over until your next pay check? If so, chances are that you have at one time or another considered turning to one of the increasing number of payday loan providers, like Money Mart and The Cash Store and Mr. Payday that are springing up throughout Canada and on the Net.

 

According to a recent report on payday loans compiled by Statistics Canada, these loans appeal mostly to people who are young, have few savings, no credit card and who’s spending likely exceeds their income. However the loans don’t come cheap.  

When annualized, the interest rates and other fees charged for borrowing $100 for 14 days can range from 335% to 650%—rates that exceed the criminal interest provisions of the Criminal Code,” writes Wendy Pyper an analyst with Statistics Canada.

 

Furthermore, writes Pyper, “concerns have been raised about questionable practices in the industry, including high borrowing costs, insufficient disclosure or contract terms and unfair collection practices.”

 

The Statistics Canada study could not have come at a better time. As a result of the high fees and other reported abuses, the fast growing payday loan industry is coming under increasing public scrutiny. Three of the nine Canadian provinces that allow payday loans (Quebec is the exception) have already passed legislation that puts limits on the industry. Bills have also been introduced in both BC and Ontario, where public consultations will be held to see what further measures need to be taken.

 

How payday loans work

Payday loans are basically short-term loans that, as the name implies, are typically designed to enable a borrower to cover short-term expenses until his or her pay check comes in. According to the Statistics Canada survey, these loans are for usually between $100 and $1,000, averaging out at about $280.

 

To get one of these loans a borrower generally needs to bring identification, to show proof that he gets a regular pay check and that he has a bank account. In return for the cash, the borrower writes a post-dated check for the loan plus the fees and interest charged, which is timed to coincide with the day he deposits his pay check. The industry has sprung up from practically out of nowhere, growing from just a few stores during the 1990s to over 1,000 today.

 

While the fees charged for payday loans vary, according to a Financial Consumer Agency of Canada estimate, the cost of a typical $300 loan taken for 14 days is $50, which works out to an annualized rate of 435%. That’s far higher than the 36% charged by a typical credit card or the 21% charged for overdraft protection on a bank account.

 

As a result of their high costs relative to competitor services, payday loans are thought to be most attractive to the poor, who do not have access to either credit cards or overdraft protection. The Canadian Payday Loan Association, which represents 511 of the 1,350 outlets that offer such services, questions that assessment. According to its president Stan Keyes, a CPLA survey shows that the average family income among payday loan borrowers questioned was $40,000.

 

Industry group cries for new regulations

Ironically, it is the Payday loan industry itself that has been calling for increased regulation. “This is a fast growing industry that provides a vital service that people want,” says Keyes. “One of the best ways we can ensure that, is to eliminate those players that engage in abusive practices such as exorbitant fees, multiple loans and rollovers.”

 

To help lead the way, the CPLA recently introduced a code of ethics for members as well as a hotline, where consumers can call if they feel they have been mistreated. But Keyes doesn’t stop there. He has repeatedly called for tougher laws to protect consumers’ rights.

 

It’s hard to see right now how things will unfold. Bill C-26, the new federal law that allows provinces to regulate the payday loan industry, as long as they pass consumer protection legislation and set a maximum allowable rate of borrowing, received royal assent early this month. And so far, provincial legislation has been fairly tame. For example the new Ontario rules are primarily designed to ensure that loan providers provide adequate disclosure regarding the fees and interest rates that they charge their clients.

 

Nevertheless, if current trends, such as bank branch closures and fee hikes, which discourage lower income customers, continue, it is clear that the Payday loan industry will grow substantially in the months and years ahead. However whether the individual players eventually agree on common standards for dealing with consumers, or whether provincial regulators will need to introduce increasingly tougher legislation, remains an open question.

 

For more information about Payday loans check out:

 

The Canadian Payday Loan Association

(http://www.cpla-acps.ca/english/consumercode.php)

 

Statistics Canada Payday Loans Study

(http://www.statcan.ca/english/freepub/75-001-XIE/10407/art-1.htm)

 

 

 

Peter Diekmeyer (peter@peterdiekmeyer.com) is a Montreal-based business and economics writer.

 

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