Action needed to ban the practice as payday loan industry continues to grow
THEY ARE WHAT PAWNSHOPS have traditionally been: a sign of bad times.
Far more prevalent, cheque-cashing and payday loan outfits appear at times to be as numerous as donut shops or convenience stores. While governments have moved to regulate some of the industry’s most scammy and scummy tendencies – Ontario is currently reviewing its Payday Loans Act, introduced in 2008 – there’s been no move to do what’s right: ban the entire industry.
The government tendency to protect financial gain over the public good is clear in this case. Worse still, there’s a secondary level of business looking to profit on the misfortune of those who use payday loans, as indicated this week by an Ontario company hyping its software that monitors concurrent loans at multiple payday hucksters – those locked in the cycle of usurious fees and interest rates tend to flit from lender to lender, robbing Peter to pay Paul, as it were. With no central government oversight of the practice – the privacy-lessening niche this company hopes to fill – it’s easy for some people to get in way too deep.
The entire business is essentially parasitic, preying on the most vulnerable. Instead, the government is proposing three options to reduce fees rather than doing what’s right: $15 per $100 borrowed, $17 or $19. All three are an improvement on the current cap of $21, a figure set the last time the Liberals amended the Payday Loans Act. The $21 figure is the second lowest cost of borrowing in Canada, but ranks among the highest when compared to other North American jurisdictions. The $15 target would be the country’s lowest rate.
Still, it’s no bargain. Payday loans are an expensive form of credit. Before getting a payday loan, consider that almost any other way of borrowing money (e.g., from family or friends, a bank or credit union or your credit card) would be much cheaper. At the current maximum of $21 for every $100 someone borrows, if you borrow $300 for two weeks from a payday loan outfit, the advance will cost you $63 as opposed to $2.65 in the case of a credit card with a 23 per cent interest rate. The numbers get worse when you consider that many users get caught in a cycle of repeated loans, perhaps paying the fees but rolling over the principal. One loan becomes two, then three and so on. By the sixth loan of that hypothetical $300, the repayment cost has hit $378 as opposed to the credit card’s $15.88.
The Payday Loans Act was introduced to license all operators and ban some of the most controversial lending practices. Even then it was really too little, too late – the industry should have been axed right from the beginning, given its propensity for preying on those who can least afford it.
Far more troubling than the unethical practices, the industry is a sign of the underlying decay of our financial health – we’re maintaining our middle-class lifestyles mostly through debt. We might appear to prosper for a while by consuming beyond our means, but we’re already fraying at the edges, and not just in the unsustainable housing market.
Easy credit and low interest rates have fueled the borrowing, but it’s our spending habits that have got the better of us: bigger homes, new cars, electronic toys and so on. Our wants are limitless. Our wallets, not so much.
Worse still, our real incomes and net worth are in decline, meaning we’re borrowing just to maintain the status quo.
More of us are getting caught between falling incomes and growing household debt, which reaches an all-time high pretty much each month. Worse still, increasingly the borrowed money is being used to finance day-today expenses rather than consumer goodies.
This is no accident, nor is it the result of the financial crisis that began with the meltdowns of 2008, as the middle class has been under assault for more than three decades. The recession and “recovery” that followed collapse caused by the financial services industry is indicative of the trend: corporate profits and executive bonuses quickly bounced back, while unemployment remains high and those with jobs work longer and harder to tread water.
The decline to virtual serfdom is intentional. Look at the history of automation and productivity gains in industry. They were supposed to bring us a higher standard of living and more leisure time. Instead we got neither. In fact, just the opposite happened. Corporations did in fact make larger profits, but the money was shuffled into the hands of a few and into dubious financial transactions. At first, workers in Canada, the U.S. and other advanced economies were displaced by the productivity gains. Real wages fell as unemployment levels rose, putting more downward pressure on incomes due to the competitive job market. Later, of course, more of the jobs were transferred offshore to low-wage countries, a trend that continues today. The result? More profits, with almost all of the gains concentrated in a few hands.
Governments routinely aid and abet the shift. That’s why there is no effort to shut down the payday loan industry: someone profits – and gives money to politicians – and the lenders serve as something of a safety valve, albeit damaging and ultimately futile, as people sink into a financial morass, starting with the most vulnerable. The entire credit industry that keeps those in the middle afloat just now is set to swamp that group, too.
More people are taking note of the inequities and the resultant social unrest that’s starting to bubble to the surface, but don’t expect the situation to change anytime soon.