Banning payday loan shops no answer

Let’s deal with why people need to use them first, says Brian Dijkema.

Mayor Jim Watson worries about a “glut” of payday loan shops in Ottawa, and wants to crack down on the number of outlets in the city. Coun. Mathieu Fleury suggests these supposedly short-term loans put vulnerable people in “even more challenging financial situations.” There’s reason to be concerned. Research by the think-tank Cardus has found that payday lending is correlated with violence, property crime, increased need of social assistance and increased premature mortality.

That’s not to say that payday loan stores are the cause of these problems. Rather, payday lending is one part of wider social challenges for the city and loan customers. It’s important Ottawa Council take the right action to deal with it. Wrong moves could hurt the folks who need the most help.

Let’s get one fact straight: When people with poor (or no) credit are desperate for cash, they’ll find ways to get it. We know from the research that the overwhelming majority of people who turn to payday loans do so to meet basic needs. Only 13 per cent use them for discretionary purposes.

Though payday loans are expensive and take advantage of desperate customers, they are often cheaper for consumers than alternative forms of small-dollar finance. Sometimes these loans cost less than non-sufficient fund fees, fees levied by companies for missed bills, or disconnection costs for hydro. We also know that if folks can’t get cash in a regulated payday loan shop, they’ll turn to even worse alternatives: loan sharks or completely unregulated online lenders.

That’s why banning payday loan shops isn’t a solution. For the same reason, copying the City of Hamilton’s decision to limit the number of lenders to one store per ward — a sort of soft ban — doesn’t make sense either. It hurts consumers more than it hurts lenders because vulnerable people still end up with fewer regulated options to use. These arbitrary, blanket limits reward surviving payday loan operators by reducing the competition they face, essentially giving them local monopolies.

However, there are positive actions cities can take.

Start by focusing on the people who use payday loans. Ottawa councillors and officials need to get to know who uses payday loans in the city, and why. Both the payday loan users and borrowers have a story to tell. It’s valuable to listen first, collect objective data, then make policy based on that information.

While adopting a blanket ban or arbitrary limits on the numbers of payday loan shops isn’t the way to go, Ottawa can and should use its zoning authority to keep these businesses away from populations with particular vulnerabilities. Establishing buffer zones around group homes for especially vulnerable residents, for instance, can be helpful. Cities already enact similar zones to limit where bars or strip clubs can locate, keeping them way from children in schools.

The most important measure goes beyond restrictions. The city can encourage the creation of affordable alternatives to payday loans, providing community-based competition for the industry.

Take the Causeway Community Finance Fund in Ottawa, for example. It co-operates with credit unions to offer low-cost loans combined with financial literacy for borrowers. There’s a desperate need for more such alternatives in the city. But such efforts face obstacles — which cities can help clear.

Cardus research shows approximately 75 per cent of the costs of providing small, low-cost loans are linked to overhead, including marketing and storefront space. Ottawa almost certainly has surplus advertising space on OC Transpo to offer to community-based payday loan alternatives at no charge. And board rooms at community centres can serve as office space where payday loan alternatives can set up shop, meet clients and provide credit counselling. Allowing community finance alternatives access to these underused and valuable resources can clear the weeds for what the market really needs: cheaper loans for the residents who need them.

There are no easy solutions. The demand for short-term, small-dollar loans will always be there. Ottawa must be careful not to do anything that pushes desperate residents to use other worse options, such as loan sharks or shady, online lenders. Rather, it can help residents access positive alternatives that help them escape the debt treadmill.