Borrow in haste — repay forever
Payday loans create cycle of debt: Poll Few realize high cost, citizen group says
The annual interest on a $500 loan today that will cost $650 to repay two weeks from now is 782 per cent. Too abstract? That’s 40 times higher than a cash advance on a standard credit card, and 130 times more than the interest charged on an unsecured line of credit.
Despite government education campaigns, in-store brochures and cost-of-borrowing disclosure requirements, few cash-strapped Torontonians who are turning to payday lenders for short- term relief give it much thought. Even those who can least afford it take out repeated, back-to-back payday loans, according to a new survey.
Payday borrowers either had no idea how much the cost was as a percentage, or grossly underestimated the figure, according to the survey, commissioned by the Association of Community Organizations for Reform Now (ACORN), a grassroots non-profit citizen group with offices in Toronto and Vancouver. The findings are based on surveys conducted from July to October with 419 payday loan clients — 204 in Toronto and 215 in Vancouver — all of them interviewed as they left businesses that offer payday loans. There were many similarities between the two cities, although seven in 10 Toronto borrowers reported household incomes below the city median, slightly more than Vancouver.
“ I think the evidence is clear that it’s the people with the lowest incomes who are the most constant repeat users, and who have no ability to repay. It’s certainly been the suspicion, but this is the first time anybody’s seen any significant numbers to bear that out,” said John Young, executive director of ACORN, which has launched a national campaign to highlight the industry, a business it refers to as “ predatory” lending.
“ I think this is something governments are going to be very interested to learn.” The ACORN study, conducted by Strategic Communications Inc., is one of only a few comprehensive studies carried out on the burgeoning and unregulated payday lending industry. Among its findings:
Two-thirds of borrowers in the two cities said they would switch to a bank or credit union if they offered similar shortterm loans. Although some credit unions are experimenting with such loans, banks have stayed out of the business and point out that they offer other, much cheaper, short-term alternatives.
About one-quarter agreed they had in the past “ felt uncomfortable or intimidated” by the collection practices of payday lenders.
While the vast majority surveyed had chequing accounts, only 42 per cent had a credit card and 33 per cent had overdraft protection. Only 7 per cent had a home mortgage.
Three-quarters of those interviewed didn’t know that fees charged on the loans count as interest, as suggested by recent case law, and two- thirds were unaware of the Criminal Code provision that caps legal annual interest rates at 60 per cent — a rate payday loan fees and interest, when combined, far exceed. The fees and interest charges attached to a typical two- week payday loan, when combined and calculated as an annual interest rate, range from 300 to 1,000 per cent.
Sharol Jason is a Toronto ACORN member who lives in Weston, where a number of lenders have set up shop. Although not a customer, she knows people who are.
“ When that’s the only kind of place you can go to, they sort of have you by the throat,” she said during a recent gathering of ACORN members outside a Money Mart. Most of the big payday lending companies, including Money Mart, the Cash Store, and Instacash, along with a handful of others, have been named as defendants in proposed class- action lawsuits that allege they are charging criminal interest rates. The industry has grown from a handful of stores less than a decade ago to an estimated 1,200
stores across Canada.
Not one has been prosecuted under the Criminal Code.
Ontario, along with
other provinces and the
federal government, has
been studying the industry. Earlier this year at Queen’s Park, the NDP introduced a bill that would have instituted regulation of the province’s payday lenders. The bill stalled when the Liberal government withdrew support, said ACORN’s Young. As part of its survey, ACORN asked Toronto borrowers if they approved of the government move, which would “ leave the industry unregulated for the foreseeable future.”
Seven in 10 did not.
Ontario’s consumer ministry had hoped cost of credit disclosure requirements introduced this summer in a revamped consumer protection act would clear up confusion and allow consumers to make their own choices. But critics of payday loans say the businesses attract vulnerable borrowers who don’t have much choice, and who can easily become trapped in a cycle of debt. Stores typically lend $100 to $ 500, with the full amount — plus $20 and $ 150 in interest and fees, respectively — due the following payday. If coming up with the full amount proves difficult, borrowers can opt to pay down the old loan and immediately take out a fresh loan, which comes with more interest and fees. And that is just what borrowers are doing, the ACORN study found. More than half of those surveyed had at least once in the past year taken out a payday loan right after paying off an earlier one. One in five reported having done so six or more times in the year. One in five respondents chose not to reveal how often they use payday loans, which suggests these numbers are “ undoubtedly, in fact, underestimates,” says the report.
It’s that kind of repeated use that even the Canadian Payday Loan Association, which represents close to 40 companies that together operate two- thirds of the payday stores in the country, warns borrowers about in its pamphlets.
Yet, the repeat clients are crucial to building a successful payday business.
Following the launch of the lawsuits alleging payday lenders charge criminal interest rates, and ensuing media attention that likened the business to loan sharking, the big players in the unregulated industry formed the association to bolster its image and lobby Ottawa and the provinces.
It also set up its own code of conduct and created a “ guide to responsible borrowing” brochure for clients, which includes warnings.
“ If you feel you are using a payday loan too often,” reads the Canadian Payday Loans Association pamphlet, “ consider other borrowing options such as asking a friend, employer, or family member for a small loan. You might also consider obtaining an overdraft, or a line of credit, or consolidating your debt at your bank.”
It also urges chronic borrowers to get credit counselling help if debt gets out of control. The industry argues that it is serving the needs of customers the banks have chosen to ignore, and that the short- term, unsecured loans are costly.