By: Kaitlin Mackenzie, Law Student
Where do you turn when you have $40 in your bank account, your rent is overdue, you’re out of groceries and you don’t qualify for a bank loan? For most Canadians, the answer is a payday loan.
It’s hard to turn on the television, surf the web or walk down the street without seeing advertisements for payday loans. Most ads offer instant cash despite poor credit and claim that payday loans are “safe, fast and affordable”.
The problem is, payday loans don’t seem to be either affordable or safe. In fact, many experts argue that payday loan companies target poor and vulnerable people who don’t qualify for bank loans, charging high interest and fees and that keep low-income people trapped in cycles of debt and poverty.
This is a real problem that needs to be addressed by the Canadian government, not only because it continues cycles of poverty for many Canadians, but also because the right to enjoy an adequate standard of living is protected under international law.
What is a payday loan?
Most people go to a bank when they need a loan to pay for emergencies, like when you’re low on money for next month’s rent or need to cover your child’s school field trip. Banks are regulated by the government which means they must follow certain requirements, restrictions and guidelines that protect citizens.
The problem is that the government does not regulate payday loan companies. That means that private corporations set their own guidelines.
The affordability of any type of loan, in a bank or pay day loan centre, is based on the interest rate (a percent per year of the amount borrowed). For example, let’s say that Sherry wants to borrow $1,000 from her bank. The bank says, “10% interest”. So, to borrow $1,000 for one year will cost Sherry $100 in interest.
Payday loans have much higher interest rates than banks, which means that they’re less affordable and harder to pay off. This is why some experts call payday loans “predatory”. For example, the average interest rate on credit lines offered by Canadian banks range from 3% – 5% plus prime. However, payday lenders charge interest rates over 400% when calculated at an annual (yearly) interest rate.
Parliament released a report that breaks down average interest rates on payday loans. For a payday loan of $400 over a 17-day term, a customer will pay $8.64 in interest, $9.99 in fees and $32.65 in cheque-cashing fees, resulting in an annual rate of 1,242%. So, if someone needs that $400 to cover unexpected funeral costs for a parent, they may be stuck paying back that loan for a very significant amount of time.
In a second example, a payday loan of $100 with a $10 fee will amount to an interest rate of 1,100% after two weeks and 219% after a month.
Charging annual interest rates of over 60% in Canada is a criminal offense, but Canadians are paying well above this amount. As noted by Parliament, “some payday loan companies appear to be charging criminal rates of interest”.
Who uses Payday Loans?
Research shows that payday loan customers are the working poor (people who have minimum wage employment and live below the poverty line). The working poor are more likely to rely on payday loans because they do not qualify for bank loans, especially as banks have placed more restrictions on loans under $5000 in recent years.
Map data of Toronto shows that the number of payday lenders has increased in low-income neighbourhoods, while the number of banks has declined. This means that payday loan companies are now easier to access than banks in poor neighbourhoods.
How can Payday Loans Reproduce Cycles of Poverty?
It is easy to see how payday loans can accumulate. When payday lenders attempt to withdraw debt from a borrower’s account, the money is often unavailable. The borrower is then charged late fees by the payday loan company. Unable to afford loan payments and additional fees, the borrower is forced to take out a second payday loan to pay off the first, with added fees. Thus, cycles of debt are reproduced.
What should be done?
At the heart of the issue is the point that many people in Canada need payday loan companies because other supports don’t exist. When emergency situations arise and a person isn’t able to secure a bank loan, payday loans are often the only place to turn. The growth of the payday loan industry is directly linked the inaccessibility of bank loans and other supports in Canada.
We are responsible under international human rights law to ensure that all people in Canada have access to an adequate standard of living. Such a right is protected under many international laws and treaties, including the Universal Declaration of Human Rights. It’s time for us to unite as a country that takes those human rights responsibilities seriously so that people living in poverty don’t need to turn to payday loan agencies when emergencies arise.
Canada Without Poverty is a non-partisan, not-for-profit, charitable organization dedicated to the elimination of poverty in Canada. CWP is here because of your support. We would not be able to continue our work in eliminating poverty without your help. Please consider making a donation to CWP to support our work in ending poverty for everyone in Canada.