The high cost of payday loans
Who benefits from cash in a flash?
DYLAN FERGUSON STAFF
Even on one of the coldest nights of the year, they flock to the yellow and red lights like moths to a hopeful porch lamp. The disenfranchised, the disillusioned, and the generally dissed. All of them drawn to a 24-hour Money Mart to cash their cheques or take out payday loans and keep their personal finances chugging along just a little bit longer
This past March, the Manitoba government introduced legislation that would regulate companies offering payday loans, putting the spotlight on an industry that appears controversial in even a dim light. Say, the soft yellow glow on Money Mart’s snowy steps.
The payday loan industry is a relatively new phenomenon. Before the early ’90s, there apparently was no such thing. However, in the past decade or so, the number of payday loan offices in Canada has grown from zero to 1,350, a figure that rivals the number of Royal Bank branches, creating an industry that generates an estimated $2 billion a year.
A payday loan is a short-term loan of a relatively small sum of money — defined as less than $1,500 by the Payday Loan Association — provided by a non-traditional lender, and typically paid back on the customer’s next payday. In Canada, the biggest payday loan operators are Money Mart, Rent Cash, and Cash Money, though there are many smaller institutions providing the same service. Money Mart, a subsidiary of the American company Dollar Financial Group, is the Canadian industry leader, and certainly the most familiar brand for Winnipeggers.
To receive a payday loan, a customer must typically produce identification, a pay stub to prove regular employment, and often a bank statement. The customer normally has to give the lender a post-dated cheque for the amount needed, plus interest and fees, or authorize a direct withdrawal from their account. According to the Canadian Payday Loan Association, the average loan is for $280, for a period of 10 days. People who use payday loan services are charged interest, as well as a standard fee, and often a cheque-cashing fee, as well as a start-up fee for first-time loaners. This fee-for-all often works out to a nominal one-time interest rate of 10 to 30 per cent. However, when calculated annually, the per annum interest rate is often in excess of 1,000 per cent.
According to the Canadian Criminal Code, Section 347, per-annum interest rates in excess of 60 per cent are a criminal offence. With the various fees factored in, as specified by the Criminal Code, most payday loan outlets charge annual rates far greater than 60 per cent every day. In other words, they are committing usury: the charging of illegal interest.
Payday lenders have gone essentially unregulated, probably due to the stickiness of the shared federal-provincial jurisdiction they fall under. Though usury is regulated by the federal Criminal Code, the consent of a provincial Attorney General is needed to prosecute anyone under Section 347. Several civil suits have been tried — so far, unsuccessfully — and in one groundbreaking instance last year, Winnipeg police actually laid charges against Paymax Inc.. But a provincial government has yet to prosecute a payday lender.
The legislation introduced by Manitoba’s NDP government in March 2006 would make it the first province to regulate the industry. The regulations would require payday lenders to be licensed and bonded, to warn customers about their high fees, and allow them to cancel any loan within 48 hours. It would also prohibit additional fees when loans are renewed, and prevent the lenders from making customers sign over future wages or title loans. The bill still needs the consent of the national government, but that consent seems to be on the way, thanks to legislation introduced by the federal Conservatives in October of last year, which would allow provinces to regulate the payday loan industry.
As Manitoba Finance Minister Greg Selinger said in his press release, “we want to ensure that borrowers are protected against high fees and industry practices that contribute to the debt spiral that borrowers can encounter.”
That “debt spiral” is often encouraged by the controversial use of what are called rollover or back-to-back loans. This is when a customer cannot pay off the loan in time, and is allowed to essentially take out a new loan on their previous loan — with new interest and fees added.
In addition to rollovers, payday lenders have been accused of various criminal infractions.
Maureen Alexander from Scarborough, Ont. told me about her bad experience with a payday loan outlet. After writing a cheque for $250 to cover her loan, she says “[They] called me up and they told me the cheque had not gone through. Instead of $250, they were going to charge me $400.”
Alexander obtained a copy of the cheque from her bank, proving it had been processed. After showing it to the lenders, she says, “I haven’t heard from them.”
Even aside from her own claims of being victimized (at least in intent), Alexander believes that “the money they charge is excessive,” adding that the next time she is in a desperate financial situation, she’ll borrow from family.
Still, she acknowledges that “a lot of people don’t have that option. They’re just throwing away money by going to the money lenders . . . for a lot of people it’s just like a habit going there. They don’t realize it’s costing them.”
Stan Keyes attributes the experiences of people like Maureen Alexander to a select group of “bad apples.”
Keyes is the president of the Canadian Payday Loan Association (CPLA), which was created in 2004 to internally regulate the companies that offer this service, and give them a bit of respectability. “We need to shut down the bad apples, and let the committed, responsible lenders provide what is clearly a much-needed financial service.” He says. The CPLA represents 23 different companies, including Money Mart.
“The CPLA actually applauds the Manitoba government for passing payday loan legislation,” he says, “that balances strong consumer protection with a viable industry.”
Some payday loan outlets argue that if the Criminal Code’s 60 per cent interest cap is enforced, their businesses will not be profitable. Though you might find it easy to scoff at this notion, payday lenders do not have it so easy financially.
According to a study by Ernst & Young, which was commissioned by the CPLA, 26 per cent of business costs for such institutions go towards “bad debts,” or loans that simply cannot be repaid. That’s a considerable financial burden that places like Money Mart must face on top of the usual operating costs.
The one province where the 60 per cent is not an issue is Quebec, where an administrative order stipulates that payday lenders may not charge more than 35 per cent interest. This makes it uneconomical for them to operate, so they don’t; payday lenders are an unknown phenomenon in la belle province.
Critics of payday lenders would say that if they cannot operate under the letter of the law, then they should not operate at all. But others have a different perspective.
For many in Winnipeg’s North End, for example, banks are not a viable option, either because they have poor credit, or there are no longer any banks in the area. In the last decade, 10 banks have shut their doors in the North End, and it is not alone. According to the Financial Consumer Agency of Canada, 700 banks closed nationwide between 2001 and 2003, mostly in low-income neighbourboods — and payday loan outlets have been readily popping up to take their place.
Depending on how you look at it, the sheer number of payday loan outlets that have exploded on the scene in the past few years can be an argument for one of two opposing viewpoints. Either the industry has proven very
“The alternatives, of course, can be, well, if somebody needs to borrow 250 bucks, they’ll unplug their television, bring it to a pawn shop. Or, they’ll go to loan sharks.” — Stan Keyes
successful in taking advantage of uninformed, desperate people, or it genuinely fulfills a need in our society that many individuals have been glad to benefit from.
Stan Keyes would argue the latter, and he takes issue with the federal article that makes payday loans technically illegal.
“The Criminal Code 60 per cent limit on interest never foresaw the payday loan industry,” he told me. “To apply an annual interest rate to that $280 [the average payday loan] is the wrong measure, because you’re not borrowing $280 every two weeks for a year . . . You’re borrowing it for 10 days.” He compares applying annual rates to a short-term loan like going to a hotel and having a clerk tell you the room is $50,000. Only once you specify you’re staying for one night, not a year, does the clerk tell you it’s actually $150. “It’s just the wrong measure.”
Keyes says that an absence of payday loan outlets benefits no one. “Because the alternatives, of course, can be, well, if somebody needs to borrow 250 bucks, they’ll unplug their television, bring it to a pawn shop. Or, they’ll go to loan sharks.”
There may be a different answer. Just this past November, the City of Winnipeg helped to create the Community Financial Service Centre in the North End, which provides lower-income citizens with alternatives to payday loaners.
“I can find it reprehensible what [payday lenders] are doing to the clients we are running into, but it’s really beyond our control,” says Debra Joyal, who manages the centre, which she helped create. The centre makes it easy for clients to open bank accounts and offers financial guidance, as well as micro-loans between $20 and $100. “We have been in the making for over 10 years,” says Joyal of the new initiative. “It was an idea that came into being once the banks started pulling out of the area.”
Despite her strong feelings against payday lenders, Joyal would not go so far as to wish them away. “Perhaps they do serve a niche for some people that we cannot help.”
Even Maureen Alexander, who was the butt of the industry’s shady practices, concedes on that point. “They exploit the low-income people, for sure. But, you know, some people rely on it,” she says. “They definitely do harm, but I wouldn’t say more harm than good.”
I asked one man coming out of the Money Mart in the frigid night why he uses their services. “They’re helpful, especially if you screw up your bank work,” he said. “But it’s basically illegal loan-sharking,” he added, smiling wryly at the irony of his statement as he clutched his receipt and shuffled away from the less-than-comforting yellow glow and back into the dark.
