Posted March 29, 2022
A new report highlights the impact that high-cost loans had on low-income borrowers during the pandemic, pointing to examples of people falling into “vicious cycles of debt” as they struggled to cover the escalating cost of bills.
The report published Thursday by ACORN, which advocates for low- and moderate-income Canadians, comes as the non-profit group renews its call for the federal government to slash the legal limit for interest rates on instalment loans to 30 per cent, down from 60 per cent.
The survey of 113 ACORN members who turned to high-cost lenders such as Money Mart, Easy Financial and Cash Money revealed that a high proportion turned to payday loans, short-term, smaller loans with extremely high annual interest rates.
But a large number also took out instalment loans — which are paid back in instalments over a longer period of time — borrowing from $1,500 to $15,000 at annual interest rates of up to 60 per cent.
“This should be a priority and the government should move on this, and fast,” said Donna Borden, an ACORN leader and spokesperson on predatory loans.
Borden noted that 46 per cent of respondents to the survey said they took out instalment loans of up to $15,000, an increase from before the pandemic and a trend she called “alarming.”
“The government is committed to cracking down on predatory lenders by lowering the criminal rate of interest,” Adrienne Vaupshas, press secretary for the minister of finance, said in an email Wednesday.
She said further details regarding a consultation process on the issue will be available “in due course.”
To improve access to financial services, ACORN is also calling on the government to force mainstream banks to offer more low-cost borrowing options to people and reduce the fees charged when clients have insufficient funds to cover a transaction. The group is planning a national day of action on the issue on March 31.
Laura Pellacani, who participated in the ACORN survey, had to take out a loan of $2,500 just before the pandemic to cover the cost of flights back to Canada for her children, who were abroad with their father. Because of the high interest on the loan, she said she would have to spend about $6,000 to pay it off over five years.
“I had no options with banks,” she told the Star in an interview, explaining that owing to bad credit, she has been unable to get a regular bank loan or credit card.
Pellacani, who collects ODSP, used to earn extra income as a dog walker, but the work dried up when COVID-19 hit and her clients were all at home with their pets.
She’s only been able to pay down $500 of her debt and regularly turns to payday loans to help cover her bills. Even with a monthly delivery from a food bank, Pellacani said she is struggling to pay for groceries as the cost of food rises.
Often forced to borrow a little more each month, she compares payday loans to a cycle that doesn’t stop.
“Payday loans target poor people who struggle in day-to-day life and live paycheque to paycheque,” she said.
Payday loans are regulated by provincial governments, and lenders are exempt from even the 60-per-cent limit on interest. In Ontario, for example, 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.
In a December mandate letter, Prime Minister Justin Trudeau asked Finance Minister Chrystia Freeland to “crack down on predatory lenders by lowering the criminal rate of interest.”
The Canadian Consumer Finance Association, which represents lenders such as Money Mart, Cash Money and Cash 4 You, said in an emailed statement that reducing the legal interest rate could actually hurt some borrowers by cutting off all access to financing.
Instalment loans are high risk and expensive to provide, the CCFA said, noting that a borrower’s credit score is a key factor in determining the interest rate charged on such loans.
“Any reduction to the federal maximum interest rate will result in removal of access to credit for those Canadians with lower credit scores who previously qualified at the current rate,” the CCFA said. “The federal government should not take any action that results in denial of credit to Canadians or forces borrowers to access credit from illegal unlicensed lenders.”
Easy Financial, a publicly traded company that does not offer payday loans but does offer other kinds of alternative credit, said in a recent financial report that 8.2 million Canadians have “non-prime” credit scores of less than 720, meaning many of them cannot access credit from banks or traditional lenders.
It estimates these Canadians, which it calls its “target market,” collectively carry $186 billion in credit balances.
Article by Christine Dobby for the Toronto Star