Opinion: The true price of payday loans

Interest rates out of line with other forms of alternative credit

If you think interest rates on credit cards are too high, think again.

Hundreds – probably thousands – of people in Ottawa are paying more than FIVE HUNDRED PER CENT in annual interest to get a loan. And it’s perfectly legal.

Don’t believe it? Then you are not among those who patronize businesses that offer “payday loans.”

A payday loan is just what the name implies. You go into your friendly lender’s shop and borrow a few hundred bucks to tide you over until payday.

And, boy, will you pay through the nose for it!

If you borrow, say, $300 for two weeks, and repay the loan in full and on time, you will pay as much as $63 in interest. That’s a whopping 21 per cent.

A rate of 21 per cent for two weeks works out to an annual interest rate of 546 per cent. And that’s before compounding and any late-payment fees.

Outrageous and surely illegal, you might think. But you would be half wrong. It is outrageous, in my view. But it is not illegal.

Several years ago, the federal government enacted changes to the Criminal Code to permit payday loans if provinces regulated them. Ontario’s Liberal government passed legislation limiting the cost of borrowing to $21 per $100 per two-week period. The law took effect in December 2009.

Not surprisingly, many payday lenders now charge the maximum permitted interest. Well, why wouldn’t they?

It is not known how or why the government of former premier Dalton McGuinty decided that an annual interest rate of 546 per cent was the appropriate level.

In contrast, pawnbrokers in Canada are restricted to charging a maximum of 60 per cent in annual interest. That is the rate charged by Accu-Rate, a leading foreign exchange dealer in Ottawa, which recently entered the pawnbroker business.

Accu-Rate offers loans at five per cent in simple interest per month in exchange for the deposit of valuables such as jewelry or silver.

Money Mart, a leading payday lender in the Ottawa area, recently sought to attract new or repeat borrowers with advertisements proclaiming: “Get a $200 payday advance FREE!”

The ad said the offer was valid only for the first advance or for the first advance in a year.

For clients who accepted Money Mart’s offer, the savings in interest on that $200 loan amounted to $42 if they repaid the loan in two weeks. But how many of those clients were able to repay the loan on time?

Not just anyone can get a payday loan. At Money Mart, applicants must be at least 18. They must have a bank account. And they must prove they have a steady job.

I asked Scott Hannah, president of Canada’s Credit Counselling Society, why anyone would take out a loan at 546 per cent annual interest – or, as the lenders express it, 21 per cent for 14 days?

His response: “In speaking with thousands of consumers with payday loans who come to our organization for assistance, many of these consumers do not fully appreciate the actual rate of interest.”

And, Mr. Hannah adds: “Often we see that consumers who regularly use payday loans do not have access to other sources of conventional credit such as credit cards, lines of credit or overdrafts.” He estimates more than 750,000 Canadians regularly or occasionally use payday loans.

Payday lenders, in other words, are providing a service that a segment of the population needs.

But why does this service cost so much?

People lucky enough to have a credit card frequently grumble at having to pay interest rates of little more than 1.5 per cent per month on their outstanding balance. Give me a break! These people have the convenience of buying on credit, plus the advantage of free credit from the purchase date to the date on which the monthly bill is due.

For payday lenders, it’s good business to maximize profits, as these lenders clearly do. On top of that, the good clients of payday lenders must pay for the bad ones who default on their loans. Those seemingly exorbitant interest rates are not all profit for the lenders.

Clients of payday lenders, having accumulated large debts of unpaid interest, are sometimes able to escape much of this debt by seeking help from a credit counselling organization. One such organization is Consolidated Credit Counseling Services of Canada.

A senior official there told me payday lenders sometimes waive payment of all accumulated interest, in return for the money initially loaned to the client.

But for the vast majority of payday loan customers, the obscenely high interest rates that are out of line with other forms of credit remain a fact of life.