The stories are common enough: someone in Canada faces an insurmountable expense– their car breaks down or a massive credit card bill comes due – but as someone barely making ends meet each month, they don’t have the financial reserves to cope.
Still others have to find a way to cash a paycheque because they are unable to acccess a bank account.
That’s where payday lenders often enter the scene. For many people in Canada who are living in low-income and poverty, and the one in three people in Canada unable to cover their monthly bills or debt repayments, these lenders provide the only relief for immediate financial crises. But these loans come at an exorbitant cost, with interest rate percentages in the hundreds – and sometimes even thousands, along with high service fees and other crushing penalties.
Predatory lending is not new to Canada, but recently some provincial governments have been working to bring in new regulations to the industry to stop payday lenders from cashing in on economic insecurity.
In Alberta, the number of payday lenders dropped 25 percent since new legislation on the industry came into effect in 2016. The changes included an extension of the time borrowers can repay loans; instead of repaying a loan that could cost up to $23 for $100 borrowed in just two weeks, borrowers have up to six weeks, and loans are down to $15 for every $100.
The Act to End Predatory Lending also prohibits lenders from giving additional loans to customers who already have an outstanding one with the company and bans lenders from penalizing borrowers who pay loans back early, in addition to other regulations.
In Hamilton, Ontario, new legislative changes to the lending industry came into effect on January 1 – including a cap to the number of lenders at 15 and limitations on lenders setting up in areas with higher numbers of low-income residents. As with Alberta, the loan rate throughout the province has also been reduced to $15 for every $100 borrowed. The Hamilton Poverty Roundtable has welcomed the new changes “to curb the industry’s abuses”.
In Saskatchewan, new regulations roll out on February 15 – lowering the borrowing rate from $23 for $100 to $17 – dropping the effective annual interest rate from 600% to 450%. The service fee for loans also drops from $50 to $25 under the new regulations.
These new regulations across the country are a step in the right direction, but more is needed to limit the impact of predatory lending. People living in low-income need access to loans from traditional banks and credit unions and more efficient ways to cash their cheques.
Cardus, a North American think tank, proposed shifting the focus from capping interest rates on payday loans toward collaboration between government, banks, credit unions, and charities which can provide longer term loans and social impact bonds that are accessible to people living at the economic margins. The Canadian Centre for Policy Alternatives issued a report which showed the need for better compensation for low-wage workers and fair financial services for low-income families in the banking sector – including low-fee overdraft protection and low-interest credit for emergencies.
It is heartening that provinces in Canada are seeing some progress on increasing the minimum wage and social programmes for people in low-income. But with nearly half of people in Canada living paycheque-to-paycheque, we must develop alternatives to the private lending schemes that contribute to the cycle of poverty.
Laura Neidhart is the Development and Communications Coordinator at Canada Without Poverty.
