Payday lender lines of credit and 47% installment loans create debt traps, critics say

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Payday lenders favor lines of credit as well as installment loans, which critics say are so expensive they can trap borrowers in a cycle of debt. This photo, taken in January 2020, shows a Money Mart store in Vancouver. (Maggie MacPherson / CBC – image credit)

Patricia Edwards of Toronto wanted to help her two grown daughters when they got behind on paying bills for the townhouse they share.

She has few assets and a bad credit history, but she was employed at the time. So she turned to a payday lender, not for a payday loan, but for a permanent line of credit.

“I was like, OK, let’s see if I’m eligible for the loan because I’m working.”

Edwards, 53, was able to borrow $ 1,500 in early 2019 from Cash Money. But then she lost her job and in 2020 came the pandemic. She had to refinance the loan twice and turned to another lender, Money Mart, for a two-year installment loan.

Today, she has a total debt of almost $ 5,000, paying almost 47% interest on the two loans.

WATCH | Ottawa under pressure to cap high interest lenders:

Her plight, and that of many other Canadians like her, has a chorus of voices calling for industry reform. Activist groups, elected officials and even some small credit companies claim that financially vulnerable people are too often drawn to low bi-monthly payments from payday lenders on long-term loans without realizing the sum of the costs.

Only option

“I would love to get a bank loan,” Edwards said. “But I don’t have a car, I don’t have a house, I don’t have any assets. I don’t qualify.”

Payday lenders claim that this is exactly why their services are essential. They provide money to people in need who might not otherwise be able to borrow.

In a statement to CBC News, the Canadian Consumer Finance Association, which represents nearly 1,000 high-interest lenders across the country, said unsecured loans are expensive to provide and interest rates of its members are approved by the government.

“Our members are highly regulated and licensed under provincial legislation across Canada,” the statement said. He also notes that “for reasons of risk, the lower the borrower’s credit rating, the higher the interest rate.”

Patrick Mohan runs Money Direct, a payday loan company with nine locations in Ontario and Nova Scotia, but he’s critical of the big chains. He created another organization in 2008 to represent operators closer to his business size, the Independent Payday Loan Association of Canada. He said the group is made up of 50 small “moms and pop” lenders who don’t offer long-term loans or lines of credit.

Patricia Edwards of Toronto reviews her loan agreement.  The mother of two is nearly $ 5,000 in debt to two payday lenders.

Patricia Edwards of Toronto reviews her loan agreement. The mother of two is nearly $ 5,000 in debt to two payday lenders.(CBC News)

Member companies cash checks and sell Western Union money transfers, but in terms of lending, only provide short-term payday loans, which are meant to give the consumer the funds to make ends meet. until his next paycheck arrives. Borrowers pay $ 15 every two weeks for every $ 100 borrowed, and he says most pay off their loans quickly.

“The payday loan product is a pay period,” he said. “Say you need $ 400. You walk in, you get the money, then pay back $ 460 under the current rates, and that’s it.”

Mohan said larger chains such as Money Mart, easyfinancial, Cash 4 You and Cash Money have started offering a wider range of financial products, including high interest long-term loans and lines of credit, after as several Canadian provinces began cracking down on payday loans in 2016, limiting the fees charged. Alberta has reduced the fees from $ 23 to $ 15 every two weeks, while Ontario has reduced them from $ 21 to $ 15.

“They saw what was going to happen, and then they started pushing the lines of credit and the installment loans,” he said. “They were like, ‘Keep it under 60% and we won’t have to worry about the federal authorities suing us.’”

An interest rate of 60 percent is the threshold specified in the Criminal Code of Canada as illegal.

Push for change

Acorn Canada, a national organization that defends the rights of low-income people, has taken on big payday lenders, organizing protests across the country and calling on the federal government to take action.

Donna Borden, vice president of Acorn’s East York branch in Toronto, said the pandemic has forced more Canadians to turn to high-interest lenders.

“A lot of people use or take these loans to buy food, to pay their rent,” she said. “And especially now with COVID, it’s even worse.”

According to the results of a limited online survey conducted by Acorn in February, installment loans, for which regular repayments are expected over several years, were the fastest growing credit segment among payday companies. He found that the number of survey respondents who said they had taken out installment loans had increased from 11% in 2016 to 45% in 2020.

People are losing their jobs, so they are in desperate need of the money, ”Borden said.

Acorn Canada, a group that advocates for low-income people, staged protests against what it calls

Acorn Canada, a group that advocates for low-income people, staged protests against what it calls “predatory loans” in nine Canadian cities on February 17, 2021.(Gland Canada)

The Canadian Consumers Finance Association disputes that their loan portfolios are increasing.

“There has been a significant and sustained decline in the number of loans taken by Canadians,” CCFA said in its statement to CBC News.

He pointed to government support programs and a “lack of spending during closures” as causes.

Patrick Mohan, of the Independent Payday Loan Association of Canada, said he noticed a similar trend.

“We’re still down 35 to 40 percent,” he said, referring to the level of demand he is seeing. “Things are coming back a bit, but people aren’t spending that much and they don’t need to borrow.”

“A gold mine”

Independent Senator Pierrette Ringuette of New Brunswick sponsored two bills to amend the Criminal Code to lower the maximum interest rate that lenders can legally charge from 60 percent to 20 percent plus the overnight bank rate. day. Neither bill was brought forward due to prorogations and election calls, but Ringuette said she intended to sponsor another.

“Canada is like a gold mine for these institutions because of the current state of the legislation we have in place,” she said.

She said a number of states in the United States have placed a lower cap on the interest rates charged by payday lenders, but they continue to be profitable.

“If they can serve in states in the United States where, on average, you would have an interest rate capped at 10, 12, or 15%, they can serve Canadians very well at 20%,” she said.

A page of Patricia Edwards' loan agreement shows her interest rate of 46.9%.

A page of Patricia Edwards’ loan agreement shows her interest rate of 46.9%.(CBC News)

But Ringuette said it can take years to get bills through the Senate, and then longer to get them through. She said the Trudeau government could act much faster, possibly even announcing a crackdown in the next federal budget due in April.

“It can be done within three months, and it has to be done within three months,” she said. “I hope everyone is in the budget.”

Trying to escape the debt trap

Patricia Edwards said she was concerned that she would never escape the debt trap. She is left to search for a solution. For example, while it’s not an option in her case, she even thought about how borrowing with a credit card might help solve her 47% interest rate problem.

“If I could get a $ 10,000 Visa card for 19%, I would get the Visa card to pay them all off,” Edwards said, “and then I will only owe 19% on the Visa card.”

Many consumers complain that credit card rates are way too high, but compared to what payday lenders charge on some of their products, these rates might seem like a bargain.

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