Crack down on payday gouging

Ontario, which is home to about half of Canada's 1,400 payday loan outlets, should move immediately to limit the unconscionable fees many are levying. Canada's largest province should not lag behind other jurisdictions when vulnerable people are at risk.

The Toronto Star
May 2, 2007

Crack down on payday gouging

Editorial

When Kim Elliott first borrowed $250 from a payday lender after her partner lost his job, she had no idea that the couple would entangle themselves in an escalating series of loans that would ultimately cost them $20,000 in interest and fees in less than three years.

But Elliott, who was featured in a 2004 Star probe into the payday loan industry, fell prey to a vicious cycle of borrowing that has become all too common among those who rely on the small, short-term cash advances to help make ends meet.

Billed by the growing industry as a convenient way for consumers to cover unanticipated expenses, payday loans can carry a hefty price. Interest and fees can jack up the annualized cost of borrowing to as much as 1,000 per cent, many times higher than rates at banks and credit unions.

These staggering charges can trap vulnerable consumers, whose low incomes or poor credit ratings make them bad risks for traditional financial institutions, in a debt spiral from which they cannot escape.

But Premier Dalton McGuinty's government, empowered by recent federal legislation that lets the provinces rein in the payday loan industry, has enacted regulations that will require payday lenders to post prominent signs disclosing the full cost of borrowing $100. The new rules also will require lenders to use a standard contract that discloses key information to consumers.

That is a good first step. People who borrow to get through rough patches should know exactly how much their loans are likely to cost.

But Ontario can and should do more.

Manitoba and Nova Scotia have passed laws capping the interest rates and fees payday lenders can charge. Other provinces are following suit.

Ontario, which is home to about half of Canada's 1,400 payday loan outlets, should move immediately to limit the unconscionable fees many are levying. Canada's largest province should not lag behind other jurisdictions when vulnerable people are at risk.

In its investigation, the Star found payday lenders target poor neighbourhoods, charge a baffling mix of interest and fees and allow back-to-back loans that can quickly exceed the borrower's ability to repay.

Indeed, those most likely to take out payday loans are often the least able to afford the steep charges. A recent Statistics Canada study found that people with few savings and no credit cards are heavy users of payday loans. So are young families, those behind on their bills and those who regularly have difficulty making ends meet.

Yet since payday lenders started popping up in Canada in the early 1990s, they have operated with little government oversight. The Criminal Code makes it illegal to charge annual interest rates of more than 60 per cent, but the law is rarely enforced. And some payday lenders skirt it anyway by calling anything above the legal maximum a "service charge."

Government Services Minister Gerry Phillips is on the right track by forcing payday lenders to disclose the full cost of their loans.

But Queen's Park should now use the powers Ottawa has conferred to regulate the cost of these loans. For too long, government has turned a blind eye to abuse and gouging in this industry. Meanwhile, vulnerable citizens are paying an intolerable price.


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