Lending advice

Payday loans have a place, but come with steep fees and dangerous pitfalls

While Canada’s debt to disposable income ratio dropped for the first time in two years recently to 168.00 — that’s $1.68 owed for every dollar earned, which is still nothing to laud — a recent MNP Consumer Debt Index poll revealed that 44 per cent of Canadians are $200 or less away from insolvency each and every month.

A fair number of those individuals would be able to resort to traditional borrowing options, be it a credit card, line of credit, re-mortgaging of a home.

But for many Canadians, especially those in lower income brackets, one of their most common routes towards solvency — however brief it may be — are privately owned payday lending services.

It’s an industry that’s proliferated in Canada since the 2000s, with 870 licensed brick and mortar stores and online businesses as of 2017. Considering the increase in borrowing and how Canadians have never been more indebted than they are today, it’s not surprising.

So yes, there’s a need, but it comes at a cost. A cost considerably higher than traditional methods as a result of higher fees, interest rates and penalties.

Say for instance, a consumer needed to borrow $300 for two weeks. On average, borrowing through a line of credit it will cost $5 plus a seven per cent annual interest fee ($5.81); borrowing through an overdraft protection will cost $5 plus a 19 per cent annual interest ($7.19); and getting a cash advance through credit card costs $5 plus 21 per cent interest ($7.42).

That same amount through a payday lender charging $21 per $100 borrowed will cost a consumer $63, an annual interest rate of 546 per cent.

That’s not a typo.

It gets significantly worse if the consumer is unable to repay the loan on time. If their cheque bounces, their financial institution will slap them with an insufficient funds charge, but the lender itself, depending on the contract, has even more latitude.

On top of a penalty fee for failing to repay on time, the lender may have the right to contact family, friends, or the employer in attempt to collect, or worse still they could sell the loan to a collection agency, which could seriously affect one’s credit score, result in legal action, home seizure, and/or garnished wages.

What often happens is that consumers who avail of these services get stuck in a debt cycle as a result of fees on top of an initial loan, leading them to take out another payday loan.

In 2006, Ottawa gave the province’s the right to exempt payday lenders from charging more than the 60-per-cent annual interest on loans if they established a regulatory system for the industry.

With the exception of Quebec — which essentially eliminated the industry inside its borders by introducing a cap of 35 per cent — and Newfoundland and Labrador, eight provinces have since introduced legislation.

In Nova Scotia, borrowers are charged $22 for every $100 borrowed, with a maximum penalty of $40 for a returned cheque or pre-authorized debit. P.E.I. has a $25 fee for every $100, but there’s no max penalty for a bounced cheque or debit. In Newfoundland and Labrador, a bill to amend the consumer protection and businesses practices act made its way through the house of assembly, but specific numbers within the regulations have not been hammered out.

The industry defends its role on the consumer finance landscape, suggesting that there’s a real need for some borrowers and that without the option more Canadians would have no choice but to pull the television off the wall, grab nan’s wedding band and head down to the local pawnshop to see what they can hock it for.

Worse still, they’ll go to one of the unscrupulous, unlicensed and unregulated online lenders that offer consumers virtually no protection and charge even higher interest rates.

High fees, they argue, are simply a result of the higher cost of service. While they support some aspects of the province’ various regulations, there is a concern that making the rules too strict will force some out of business and leave some consumers with no option for quick cash.

The best advice, as in most financial matters, is to understand the lay of the land and the specifics of the contract. A borrower should be well aware of the fees, charges and interest, when the loan is due and what penalties they might face in the event they are not able to repay on time.

The Financial Consumer Agency of Canada also suggests inquiring about a cooling off period, a short time during which you can cancel the loan without explanation or paying any of the fees.