Payday Loans


Ont. payday loan costs should be capped at $21 per $100 borrowed: board

* PUBLICATION: The Canadian Press
* BYLINE: Maria Babbage
* DATE: Friday, February 6, 2009

TORONTO – Ontario should cap the cost of payday loans at $21 for every $100 borrowed and review that limit in two years, an independent advisory board has concluded.

But the short-term loans – which critics say rip off consumers with sky-high interest rates – should not be available to everyone, the group said Friday in a report to the Liberal government.

Payday loans should only be granted to consumers who can “realistically” be expected to pay them back on time, it said.

Loans shouldn’t be advanced to welfare recipients, for example, because they are too risky to both the borrower and the lender, it added.

Anti-poverty groups and the NDP have long complained that payday lenders prey on the poor and gouge consumers by charging annual interest rates of up to 800 per cent.

However, the board concluded that payday loans are expensive because they’re designed as small, short-term loans – not because the industry is earning huge profits.

Even the best payday lenders are making “unspectacular returns,” with the average profit margin on a loan hovering around 6.9 per cent, below the 2007 national average of 8.8 per cent for all industries, it said.

And research didn’t bear out the claim that payday lenders are taking advantage of low-income families, the board said.

Most borrowers are in “financial distress” but loans are generally advanced to those who have jobs, it noted.

Many welfare recipients can’t get payday loans because most lenders require employment as a condition of granting a loan, it said.

“We met only one lender who lends to people on welfare, and then only on a highly selective basis,” the report said.

It is illegal in Canada to charge more than 60 per cent interest per year, and studies have found that many payday lending companies are charging just under that amount.

Canadians borrow an estimated $2 billion a year through payday loans, with Ontario home to more than half of the 1,350 such businesses operating across the country.

Of the 750 payday loan stores in Ontario, almost half are already lending near or below the maximum amount recommended by the board, according to the Ontario government.

But it may be weeks before the government announces whether it will follow the board’s advice, said Sarbjit Kaur, a spokeswoman for Small Business and Consumer Services Minister Harinder Takhar.

If it does, many payday lenders will have to “significantly tighten their belts,” especially in smaller towns across Ontario, said Stan Keyes, president of the Canadian Payday Loan Association.

Despite the global economic downturn, demand for payday loans has been stable over the past few months, he said.

“Many people have lost their jobs, therefore don’t have a paycheque, and if you don’t have a paycheque, you don’t qualify for a payday loan,” Keyes said.

“Those who do have paycheques are making their paycheques stretch. They’re being more cautious with spending.”

Other provinces have already set limits on what payday lenders can charge their customers.

Nova Scotia companies can charge no more than $31 on $100 of borrowing, fees and interest included, while Manitoba caps the cost at $17 on $100 of borrowing for loans up to $500.

Ontario, British Columbia, Alberta, Saskatchewan, Manitoba, Nova Scotia, New Brunswick and Prince Edward Island have all taken steps to regulate the industry after the federal government shifted the responsibility to them in 2007.

Quebec has effectively banned payday loan outlets by limiting the annual interest rate they can charge to 35 per cent.

The Maximum Total Cost of Borrowing Advisory Board for the Ontario Payday Lending Industry was created by the province to recommend an upper limit that would be fair to consumers while preserving a competitive payday loan industry.

Its 25-page report drew its findings from a number of sources, including consultations with key stakeholders and a study by consulting firm Ernst & Young.

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