Posted February 17, 2021
A new report highlighting an increase in the use of high-interest instalment loans is calling on the federal government to create a national anti-predatory lending strategy.
The study, published Wednesday by anti-poverty group ACORN Canada (Association of Community Organizations for Reform Now), recommends that Ottawa require banks to provide more services to low-income people who instead are now turning to payday or instalment loans from alternative lenders.
ACORN surveyed 376 of its members and found that 70 per cent had turned to payday loans, short-term loans that are extremely expensive compared to most other forms of credit. (ACORN represents low-to-moderate income Canadians; about 60 per cent of respondents had incomes below $30,000.)
But the survey also found 45 per cent of respondents had taken out instalment loans, which are high-interest loans that are often larger than payday loans and paid back over a longer period of time. When the group conducted a similar survey in 2016, it found just 11 per cent of respondents had taken instalment loans.
“Lack of access to mainstream banking institutions forces people to go to fringe lenders,” ACORN said in the report, noting that the three most common lenders in its survey were Money Mart, Cash Money and Easy Financial. While some people turn to such loans one time only, the report said, “there are still many who have to take these loans repeatedly or are caught in a vicious spiral because of the type of business model on which these loans operate.”
ACORN, which planned to rally members outside payday lenders in nine cities across the country on Wednesday, has been calling for legislative changes to banking at the local, provincial and federal levels for a decade. The group wants to see expanded access to traditional banks for low-income people, stating that 40 per cent of survey respondents approached banks before taking out a high-interest loan but said they were turned down. Many low-income people are also unable to qualify for credit cards with banks.
“In the absence of alternative products, the trend is towards more people taking instalment loans which means higher debt,” the report said. “Banks need to play a much more proactive role in ensuring that everyone has access to fair banking.”
The group wants to see the government force banks to reduce the amount of non-sufficient fund (NSF) fees, arguing that the current rate of around $45 causes people to turn to payday loans. For example, paying interest of $25 on a payday loan of $100 is cheaper than risking a $45 fee for bouncing a $100 cheque.
ACORN also wants banks to put an end to placing holds on cheques, which can force people who need the money immediately to pay excessive fees to cheque-cashing outlets or take out a payday loan.
The ACORN study highlighted what it called “legislative incoherence,” noting that regulations with respect to high-interest loans vary across the country. It found many provinces, including Ontario, do not have specific regulations in place with respect to instalment loans.
For instalment loans, lenders can charge up to 60 per cent interest annually, the maximum under the federal Criminal Code. As more ACORN members say they are turning to these types of high-interest loans, the group is calling on the federal government to cut that maximum in half to 30 per cent.
Lenders are able to charge much higher interest rates on payday loans (where money is advanced in exchange for a postdated cheque or pre-authorized debit) because the federal government changed the Criminal Code in 2007 to exempt payday lenders from the 60 per cent maximum where provinces regulate them. In Ontario, where payday lenders can charge $15 in interest for every $100 over a two-week period, the annual interest rates can be up to 390 per cent.
ACORN also wants to see more regulations applied to online lending, noting that 30 per cent of respondents said they took out high-interest loans online, with some saying that was more convenient during restrictions imposed in relation to the COVID-19 pandemic.
Last April, the Canadian Centre for Policy Alternatives called for increased regulation of the payday lending industry, including cutting maximum interest rates. That report came as the Star reported that while banks were cutting interest rates on credit cards in the early days of the pandemic, some payday lenders were expanding their business and continuing to charge the maximum allowable interest rates.
Article by Christine Dobby for the Toronto Star