Paying the price of payday loans
By Blake Eligh • Bankrate.com
Payday loan providers have long held a reputation for preying on disadvantaged customers, charging outrageous
borrowing fees and fostering an endless cycle of debt. But the notorious industry is cleaning up its act, thanks to new provincial
regulations to protect consumers.
Ontario is the latest province to propose new laws to govern payday loan providers. The proposed regulations
would prevent rollover loans, place caps on sky-high fees and interest charges and require all loan providers to obtain a
provincially enforced licence.
Payday heyday
Payday loans first appeared in the Canadian lending market in the mid-1990s. Since then, the number of fringe lenders has grown
to an estimated 1,350 stores across the country. Customers borrow money to tide them over to their next paycheque, often paying
more than the federally mandated 60 percent annualized interest rate.
"There is a strong demand for a small loan product in Canada," says
Credit Counselling Canada president Scott Hannah. "Some people don't qualify for overdraft protection or a conventional
credit card due to credit impairment, unstable income and job history or no credit history."
It is estimated that more than two million Canadians will take out about 4.3 million payday loans in 2008. According
to a poll by the Canadian Payday Loan Association (CPLA), the average customer
borrows $280 over a 10-day period. Depending on the lender, they may pay $17 to $49 in interest and service charges.
CPLA president Stan Keyes says the industry provides a short-term helping hand. "Consumer credit has increasingly
become the driver of the North American economy," he says. "There are times when consumers are highly leveraged with debt, so any
shock or unexpected expense to household income may result in financial trouble if they can't get their hands on a small-sum,
short-term loan."
Mad money
A $45 charge on a $300 loan won't put the average borrower over the brink of financial catastrophe, Hannah says. The trouble begins
if they can't pay it back within two weeks.
"The lender will hold the loan if the customer is willing to pay a fee," he says. "We have seen consumers who
borrowed $180 and, over the course of the year, have paid that back several times over. Because they have never been able to pay
the entire balance at one time, they have paid up to $1,000 on that $180 loan. And what do they do? Go to another entity and get
another loan -- it's a vicious circle."
Other unregulated practices, like arbitrary collection fees and inflated charges for bounced cheques, only compound
the problem. Because some borrowers are already on the financial edge, they may never be able to keep up with loan repayments.
New legislation
Consumers who use the loans are about to get some protection from provincial governments. Although decades-old laws prevented payday
loan operators from taking root in Quebec, the rest of the country has been slow to provide governance over the lending operators.
Until recently, a single federal law in the criminal code applied, but it was intended to deter loan sharking, not loan businesses.
In 2007, the federal government granted the provinces jurisdiction over payday loan operations. British Columbia,
Saskatchewan and Nova Scotia all recently passed laws, while approval of Manitoba and New Brunswick's proposed legislation is imminent.
Ontario introduced proposed laws at the end of March, and Alberta has just begun the process of drafting legislation.
|
