TORONTO, May 23, 2023 (GLOBE NEWSWIRE) — In the recent federal budget, the Canadian government committed to making changes to two different alternative financial services, installment lenders and payday loan providers. Their plan is to reduce the maximum interest rate changed by the installment lenders from 47% to 35%. It also promised yet another consultation on payday loan services and imposing an interim reduction of charges from $15 per hundred borrowed to $14.
“IPLAC recognizes that politicians truly want to help those most in need,” said Patrick Mohan, President of the Independent Payday Loan Association of Canada. “But, as often is the case, even where intentions are good, there can be unintended consequences.”
IPLAC represents licensed payday loan stores, providing the last or only choice for people with little or no available credit to bridge their immediate cash gaps. Despite the reduction in the regulated cost of these loans from $21 to $15 per each $100 borrowed, some groups claim the costs represent an unfair rate of interest.
“Payday loans are an easy target for tighter regulations, in the guise of protecting marginalized borrowers,” states Mohan, “but the truth is more complex, less convenient, and impolitic.”
Many Ontarians live paycheck to paycheck with little or no credit. With one or more jobs, they pay rent, gas, insurance, groceries, and the basics of life for themselves and their families. If they have a credit card at all, it was maxed out paying for a car repair or a new pair of glasses. They are paying the minimum monthly amount or less, with the balance increasing every month, at an interest rate of over 20% per year. The next car repair or prescription means deciding which bill not to pay, further diminishing their credit.
Historically, people had few options. Banks and credit unions were out of the question, their policies preventing them from lending to people with low credit scores. If they could not borrow from family or a friend, they had to go to an unregulated lender, often called a loan shark.
The payday loan industry began when governments recognized the need to protect working people in tight circumstances from criminals and opportunists. A framework was created making small loans available from licensed, regulated stores. In 2004, Ernst & Young determined that a rate of $21 per $100 borrowed was needed to cover both costs and a reasonable return on investment, covering rent, utilities, salaries, the risks of making unsecured loans and the other costs to keep the doors open and the lights on. Customers were protected by regulation. Lenders were protected from the risks that came with helping borrowers who were more likely to default. Customers and lenders both appreciated a regulated way of having immediate access to cash in case of emergency.
Payday loans are not cheap, making them an easy political target. Governments want to be seen protecting the financially vulnerable. They cannot force banks to make loans available to working people with bad credit, so they focus on payday loan stores.
Over the last decade, the provincial government has reduced the rate per $100 from $21 to the current $15. In the recent federal budget, the is a directive to reduce it further. Municipalities have added new restrictions to locations and licenses.
With reduced rates and increased licensing and regulation, results were predictable. Payday loan stores closed, about 35% since 2018. The remaining stores reduced employees and hours. Borrowers have fewer options.
But the unintended consequences are worse. Here are just three.
First, with less revenues, payday lenders must be more restrictive in their lending practices. Fewer people qualify. More are forced to use illegal services.
Second, and worse, with fewer locations for customers, people are looking more to online payday lenders. Located outside of Canada (many in Panama), these vendors are not subject to federal and provincial regulations. Rates per $100 are as high as $50, more than triple Ontario’s rates. And stories about these offshores taking money from customer bank accounts are increasing. When there is a problem, borrowers have no local recourse.
Third, as rates went down, many lenders moved to sub-prime lending, making loans to those who cannot get them from the bank and charging the maximum legal rate (47%). Now people are paying massive interest on longer, larger loans, forever.
“IPLAC members believe strongly that regulations are necessary to ensure payday loans services are fair for both customers and lenders,” explains Mohan. “But the government’s good intentions are paving a road to a place where Canadians are subject to offshore loan sharks and criminals. IPLAC looks to work with all levels of government to ensure continued fairness for our customers and ourselves.”
The Independent Payday Loan Association of Canada (IPLAC) advocates to all levels of government and with community organizations on behalf of small Canadian owned companies to achieve a regulatory framework that protects both consumers and lenders.
For more information:
Patrick Mohan, President, IPLAC
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