The payday loan market is changing

You don’t have to go far to find payday loan outlets in Toronto. Each time I pass one, I wonder who uses them and how much users pay for quick cash.

Kenneth Jones is a client of Credit Canada Debt Solutions, a non-profit charity that helps borrowers cut their spending and interest costs. I asked him why he was attracted to payday loans.

“I’m on Ontario Disability Support, which doesn’t pay much. Once my rent is taken off the top, I bring home $871.50 a month,” says Jones.

He considers himself frugal and goes to a food bank each week for groceries. But he supports two cats and a smoking habit. (He tried and failed to quit tobacco a few times.)

He suffers from migraine headaches and was in hospital when we spoke. The brand-name drug he uses, Imitrex, costs $69 for six pills and is not covered by his disability plan.

When he runs short of money, he goes to a payday loan outlet to fund his emergency expenses. The lender he uses is Cash Money, a national chain.

Payday loans are high-cost loans. Ontario law requires payday lenders to disclose the cost of borrowing, which can be no higher than $21 for each $100 advanced.

Cash Money, which is licenced in Ontario and other provinces, says that if you borrow $500 for 14 days, you will pay $105 as a finance charge. Your total payment will be $605.

That doesn’t sound too bad until you see the annual percentage rate (APR), which the company displays in tiny print at the bottom of its rates and terms web page.

Ontario does not require payday lenders to disclose the APR, which ranges from 443.21 per cent to 599.64 per cent for Cash Money clients in Canada.

Jones is now debt-free. He inherited $2,000 from his late mother and used it to retire his loans.

But at the age of 62 and facing three more years until he gets his Old Age Security pension, he fears he will drift back to high-cost borrowing.

Is he a typical payday loan customer? What is the average profile of debtors?

Here are some quick facts from a recent Ontario report that looked at strengthening the Payday Loans Act.

This is a niche financial product. About 3 per cent of Ontario residents (400,000 people) take out a payday loan each year.

There are almost 800 licensed payday loan locations in Ontario, operated by 249 different businesses.

About $1.1 billion to $1.5 billion in payday loans are issued each year.

The average payday loan is $460 and has a twoweek term.

Payday loans cater to those with moderate to low incomes. Borrowers may have other loan products, but tend to have exhausted their available credit and to be in more financial distress than non-borrowers.

Men and women are equally likely to take payday loans. Borrowers tend to have the same levels of educational attainment as non-borrowers, but appear to be younger than the average population.

The typical borrower takes out many payday loans in the course of a year.

Finding it difficult to repay their loans and fees and still cover their recurring expenses, they face the risk of entering a “debt cycle” of continuous payday loan borrowing.

Payday loans are traditionally a storefront-based product. A borrower goes to a retail location, provides identification and proof of income, then enters into a loan agreement and receives funds. Borrowers can also take out a payday loan online.

While the market share is only 10 per cent, online payday lending is a growing industry in Ontario, posing challenges for consumer protection.

“Unlicensed lending is simpler to offer online than through a physical location. Given the low cost of establishing a website and the ability to host their website offshore, persons seeking to offer loans without a licence face fewer risks and costs online,” the report says.

The Consumers Council of Canada released a report last month emphasizing the risks of online payday lending from the consumer’s perspective.

Its audit found that licensed lenders showed a high level of compliance with provincial rules, but unlicensed lenders showed virtually no compliance. There was no middle ground.

“Because the distinction between licensed and unlicensed lenders is so critical to the consumer outcome, it is vital that consumers be able to find this information easily,” the report said, calling for improved disclosure.

I’m glad to see renewed attention to this topic.

Payday loans were not regulated for years because of a squabble between the federal and provincial governments.

Now that payday loan laws are in place, they must be updated to protect consumers from technological changes that render them meaningless. Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca or ellenroseman.com