You can find quick cash outlets in Toronto and other cities, even on streets with lots of bank branches. There are more than 750 payday loan storefronts in Ontario.
What is the attraction? Why would people pay higher fees for credit from alternative lenders than from banks?
Most payday loan customers do not lack a fixed address or a credit history. They have access to mainstream loans, but they prefer using payday lenders when facing a shortfall and needing cash to tide them over for a week or so.
Only 15 per cent of users fall under the definition of low income, said a study by the Public Interest Advocacy Group in Ottawa.
Payday lending was unregulated until five years ago. Most provinces have now imposed licensing rules, capping the fees that can be charged and beefing up disclosure to borrowers.
In an Environics survey last year, 44 per cent of Ontario users said they knew payday lending was a regulated industry, 77 per cent knew about the fees and 95 per cent were satisfied with the customer service they received.
As a financial services industry observer, I was pleased to see the provinces regulate payday loans. But I was disappointed to see allegations that a major payday lender was trying to circumvent the rules earlier this year.
Cash Store Financial Services, a TSX-listed company based in Edmonton, said last February that it would stop selling payday loans in Ontario. It offers lines of credit, which are not covered by the province’s Payday Loans Act.
The company made the announcement days before the Ontario government planned to revoke its license for charging fees that put it over the legal limit of $21 on each $100 borrowed.
Ontario then applied to the Superior Court, seeking to declare that a basic line of credit sold by Cash Store and a related company, Instaloans, was indeed a payday loan subject to the act. No decision has been released.
Cash Store, in turn, asked for a judicial review of regulations under the act. When this was dismissed by the Divisional Court last month, the company applied for leave to appeal the decision to a higher level.
As the legal challenges made their way through the courts, Ontario decided to move quickly to protect consumers.
Last week, the Ontario consumer ministry amended the regulations under the Payday Loans Act to capture this new variety of short-term high-cost loans. By Feb. 15 of next year, lenders must be licensed to offer these products.
This will give borrowers all the protections of the Payday Loans Act, says spokeswoman Lori Theoret. She mentions a few provisions:
Concurrent and rollover loans are prohibited.
The related loan agreement has to be in writing and must contain required disclosures and mandatory text.
A copy of the loan agreement must be provided to the consumer when the parties enter into it.
Licensees can’t offer to provide goods or services, such as insurance or electronic funds transfer, in connection with the loan agreement, either on their own behalf or on behalf of another company.
On Dec. 20, Cash Store said in a news release that it intended to comply with the proposed rules and apply for a license. It was assessing the impact of the regulations on some of its products.
Payday loans are not just a niche product. Users are average Canadians with near-median household incomes — 53 per cent women and 47 per cent men — who take out an average loan of $280 for a period of 10 days.
It appears that many borrowers prefer to separate their mainstream banking from their short-term emergency needs. Perhaps they want to hide the details from their spouses or their creditors. It doesn’t matter.
People have the right to borrow money any way they want to, subject to laws that ensure costs are reasonable and disclosure is clear.
Kudos to the Ontario consumer ministry for strengthening the protection for payday loan users.
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