1
Why would anyone use "payday loan" services?
20 November 2010
I received an advertisement in the mail box, last week, telling me the "Cash Store" would soon be opening in my area, and saying I was already "pre-approved" to borrow an amount of money as per the table on the back. Given that I never applied, that's a generous offer from a stranger. Or is it?
What struck me was the cost of borrowing: 21%. Lower, it's true, than most credit cards, but a LOT higher than the current bank rates (under 5%). In very, very small type, the postcard notes that the borrowing cost of $300 for 14 days is $63. These "payday loans" are available for up to 18 days, and you can borrow up to 60% of your net pay. But there also seems to be a "brokerage fee" involved, so the actual amount will be more than just the cost of borrowing.
I suspect from what I've read (but have not confirmed) that there are additional costs (fees and greater interest rates) to borrow for longer than that period. There are certainly penalties for not making the payment by the contracted date. The federal government notes, "Service fees usually cost $10 to $35 for every $100 borrowed — or 10 to 35 percent of the amount of the loan. A $300 payday loan, due in two weeks, may cost you between $30 and $105, depending on the fees that apply... If you are not able to pay back your loan, the payday lender may place your account in collection. This means that a collection agency will contact you about the debt you owe in order to make sure you pay it.
Payday lenders may charge a fee if your debt to them is placed in collection. This will also likely have a negative effect on your credit report, and the lender could take you to court... a fee that may be applied if you pay your loan back early, before the due date... Some lenders will charge you a one-time set-up fee of $10 to $15 if you are a first-time customer."
Now if you're a minimum-wage worker - as an increasing number of our residents are - if you are fortunate enough to work 37.5 hours a week, your gross pay is about $384. Net is roughly $310 a week (less if you pay union dues). To borrow 60% of that ($186) for two weeks will cost you almost four hours of work, plus the unspecified "brokerage fee" and any "set-up" fees. It could be five, six or more hours of work to pay back the fees and interest on a loan equal to about 18 hours of work. You'd work 23-24 hours to pay it back. Is it worth it?
Given that you felt you had to resort to this sort of service at all, I seriously doubt anyone can ever escape the debt cycle through this process. Most low-wage earners are already walking a thin line trying to make ends meet, what with rent and rapidly rising utility rates.
Ontario gets off relatively easy at 21% interest: in BC, Alberta and Saskatchewan, the borrowing rate (before brokerage fees) is 23%, but in Nova Scotia, it's a whopping 31%! That's despite promises a few years back to get tough on payday lenders.
Surfing the Net, I found some interesting articles on the Cash Store (also known as Instaloans, and formerly known as Rentcash Inc.), mostly about class-action suites. In Ontario, a class-action suit was settled in December 2008. The plaintiffs asserted the aggregate of all charges was excessive. The Cash Store settled by paying $3.0 million ($1.5 million in cash, and 1.5 million in vouchers for future or existing brokerage fees. In BC, the company settled a 2009 class-action suit over excessive rates (22.54% up to March 11, 2004; 25% after March 11, 2004). This was finalized in February 2010, for $18.7 million (50% in cash and 50% vouchers).
In the USA, the Cash Store has also got into some legal difficulties. In Wisconsin, the contract came under some heavy fire when the judge ruled, "that the Cash Store can't use language in its loan contracts that bars customers from the right to be able to file or join class action lawsuits. Such verbiage has often been found in the fine print of contracts that Cottonwood Financial LTD (parent company of The Cash Store) uses. The court said that it violates the Wisconsin Consumer Act and said it was "unconscionable".
Earlier this month, a BC court ordered the Cash Store to pay $25,000 in penalties and refund customers for exceeding the maximum 23% interest rate. BC's Consumer Protection Branch estimated the excess charged on loans to be between $1 million and $5 million. Almost immediately, the Cash Store announced it would appeal that judgment. The Cash Store's CEO called the complaints a "misunderstanding," and noted, "borrowers are provided with the option of receiving their funds by cheque, by loading funds onto a debit card or by loading funds onto a prepaid credit card... if they choose the card, the contracts for those cards are directly between the borrower and Direct Cash (DC Bank or Direct Cash Management Inc.) and the fees associated with the cards accrue directly to DC Bank or Direct Cash Management."
Direct Cash is a private provider of ATM machines, and prepaid debit and credit cards. It is not related to Cash Store. But regardless of the relationship, the consumer sees only the costs of borrowing piling up.
Despite the lawsuits, the company has continued to grow in Canada and has 469 outlets across the country (about one third in Ontario) with more than 1,600 employees ("associates"). They generated a revenue of approx. $159 million last year. Cash Store Financial is the only payday advance company trading on the Toronto Stock Exchange.
The federal government weighed in on payday loan companies like Cash Store, writing, "The ongoing and expanding presence of payday loan companies suggests that some Canadians are willing to pay usurious rates of interest – in excess of that permitted under the Criminal Code – for their payday loans. This situation raises important questions about whether and how issues in the payday loan industry should be addressed, by whom, and with what consequences for the industry and its customers.
If one calculates the rate of interest charged on payday loan transactions using the definitions and methods specified in the Criminal Code, some payday loan companies appear to be charging criminal rates of interest." The report noted that the "effective annual interest" of these companies is 1,242%.
Read that again: 1,242%.
The report concludes, "Some members of the payday loan industry appear to be charging usurious rates of interest, in violation of section 347 of the Criminal Code. Criminal prosecution, however, could eliminate the payday loan industry and – in the absence of increased servicing by traditional lenders – leave some consumers without access to the credit or convenience they desire. Proposals for a Canadian regulatory regime for the industry may provide a compromise solution on which all stakeholders can agree."
Are payday loan services a necessary evil? Banks certainly don't appear eager to pick up the slack and provide short-term, high-risk loans like these outfits offer. Do we need these companies? Quebec doesn't think so - these loans are illegal in that province. Is Quebec the trend setter and is the rest of Canada doing the wrong thing by allowing them to operate at such high fees and interest rates? Are these companies preying on the most vulnerable members of our society? Or providing a service consumers clearly want and are willing to pay for?
What worries me is two things. First, we have a lot of vulnerable low-wage workers here who could find themselves caught in a spiralling descent into deeper debt by using this sort of service. Second, that no level of government seems willing to both educate and inform potential users of the risk of these services and about debt (or financial management) in general. No government seems willing or able to find ways to offer alternate, low-cost services for the many low-income people in this nation (or require banks to pony up and provide similar services at lower fees and interest rates).
A "Canadian regulatory regime for the industry may provide a compromise solution on which all stakeholders can agree" is unlikely to include many of the high-risk, low-wage customers of these companies. It's more likely a game plan to legitimize these companies and their "usurious rates of interest." Somehow I think that corporate interests will win over individual concerns here. After all, who pays more into party coffers and election campaigns - the vulnerable, low-wage victims or the companies that make profits from them?
Do people borrow at these rates for necessities? Food, rent, clothing? That would be scary. Or do they borrow for non-essential things - tobacco, alcohol, game consoles, techie toys, entertainment? That's scarier. Either way, using these companies means you're making $10 an hour, but spending like you're making $12.50- $13.50 - or more. You can't win.
What struck me was the cost of borrowing: 21%. Lower, it's true, than most credit cards, but a LOT higher than the current bank rates (under 5%). In very, very small type, the postcard notes that the borrowing cost of $300 for 14 days is $63. These "payday loans" are available for up to 18 days, and you can borrow up to 60% of your net pay. But there also seems to be a "brokerage fee" involved, so the actual amount will be more than just the cost of borrowing.
I suspect from what I've read (but have not confirmed) that there are additional costs (fees and greater interest rates) to borrow for longer than that period. There are certainly penalties for not making the payment by the contracted date. The federal government notes, "Service fees usually cost $10 to $35 for every $100 borrowed — or 10 to 35 percent of the amount of the loan. A $300 payday loan, due in two weeks, may cost you between $30 and $105, depending on the fees that apply... If you are not able to pay back your loan, the payday lender may place your account in collection. This means that a collection agency will contact you about the debt you owe in order to make sure you pay it.
Payday lenders may charge a fee if your debt to them is placed in collection. This will also likely have a negative effect on your credit report, and the lender could take you to court... a fee that may be applied if you pay your loan back early, before the due date... Some lenders will charge you a one-time set-up fee of $10 to $15 if you are a first-time customer."
Now if you're a minimum-wage worker - as an increasing number of our residents are - if you are fortunate enough to work 37.5 hours a week, your gross pay is about $384. Net is roughly $310 a week (less if you pay union dues). To borrow 60% of that ($186) for two weeks will cost you almost four hours of work, plus the unspecified "brokerage fee" and any "set-up" fees. It could be five, six or more hours of work to pay back the fees and interest on a loan equal to about 18 hours of work. You'd work 23-24 hours to pay it back. Is it worth it?
Given that you felt you had to resort to this sort of service at all, I seriously doubt anyone can ever escape the debt cycle through this process. Most low-wage earners are already walking a thin line trying to make ends meet, what with rent and rapidly rising utility rates.
Ontario gets off relatively easy at 21% interest: in BC, Alberta and Saskatchewan, the borrowing rate (before brokerage fees) is 23%, but in Nova Scotia, it's a whopping 31%! That's despite promises a few years back to get tough on payday lenders.
Surfing the Net, I found some interesting articles on the Cash Store (also known as Instaloans, and formerly known as Rentcash Inc.), mostly about class-action suites. In Ontario, a class-action suit was settled in December 2008. The plaintiffs asserted the aggregate of all charges was excessive. The Cash Store settled by paying $3.0 million ($1.5 million in cash, and 1.5 million in vouchers for future or existing brokerage fees. In BC, the company settled a 2009 class-action suit over excessive rates (22.54% up to March 11, 2004; 25% after March 11, 2004). This was finalized in February 2010, for $18.7 million (50% in cash and 50% vouchers).
In the USA, the Cash Store has also got into some legal difficulties. In Wisconsin, the contract came under some heavy fire when the judge ruled, "that the Cash Store can't use language in its loan contracts that bars customers from the right to be able to file or join class action lawsuits. Such verbiage has often been found in the fine print of contracts that Cottonwood Financial LTD (parent company of The Cash Store) uses. The court said that it violates the Wisconsin Consumer Act and said it was "unconscionable".
Earlier this month, a BC court ordered the Cash Store to pay $25,000 in penalties and refund customers for exceeding the maximum 23% interest rate. BC's Consumer Protection Branch estimated the excess charged on loans to be between $1 million and $5 million. Almost immediately, the Cash Store announced it would appeal that judgment. The Cash Store's CEO called the complaints a "misunderstanding," and noted, "borrowers are provided with the option of receiving their funds by cheque, by loading funds onto a debit card or by loading funds onto a prepaid credit card... if they choose the card, the contracts for those cards are directly between the borrower and Direct Cash (DC Bank or Direct Cash Management Inc.) and the fees associated with the cards accrue directly to DC Bank or Direct Cash Management."
Direct Cash is a private provider of ATM machines, and prepaid debit and credit cards. It is not related to Cash Store. But regardless of the relationship, the consumer sees only the costs of borrowing piling up.
Despite the lawsuits, the company has continued to grow in Canada and has 469 outlets across the country (about one third in Ontario) with more than 1,600 employees ("associates"). They generated a revenue of approx. $159 million last year. Cash Store Financial is the only payday advance company trading on the Toronto Stock Exchange.
The federal government weighed in on payday loan companies like Cash Store, writing, "The ongoing and expanding presence of payday loan companies suggests that some Canadians are willing to pay usurious rates of interest – in excess of that permitted under the Criminal Code – for their payday loans. This situation raises important questions about whether and how issues in the payday loan industry should be addressed, by whom, and with what consequences for the industry and its customers.
If one calculates the rate of interest charged on payday loan transactions using the definitions and methods specified in the Criminal Code, some payday loan companies appear to be charging criminal rates of interest." The report noted that the "effective annual interest" of these companies is 1,242%.
Read that again: 1,242%.
The report concludes, "Some members of the payday loan industry appear to be charging usurious rates of interest, in violation of section 347 of the Criminal Code. Criminal prosecution, however, could eliminate the payday loan industry and – in the absence of increased servicing by traditional lenders – leave some consumers without access to the credit or convenience they desire. Proposals for a Canadian regulatory regime for the industry may provide a compromise solution on which all stakeholders can agree."
Are payday loan services a necessary evil? Banks certainly don't appear eager to pick up the slack and provide short-term, high-risk loans like these outfits offer. Do we need these companies? Quebec doesn't think so - these loans are illegal in that province. Is Quebec the trend setter and is the rest of Canada doing the wrong thing by allowing them to operate at such high fees and interest rates? Are these companies preying on the most vulnerable members of our society? Or providing a service consumers clearly want and are willing to pay for?
What worries me is two things. First, we have a lot of vulnerable low-wage workers here who could find themselves caught in a spiralling descent into deeper debt by using this sort of service. Second, that no level of government seems willing to both educate and inform potential users of the risk of these services and about debt (or financial management) in general. No government seems willing or able to find ways to offer alternate, low-cost services for the many low-income people in this nation (or require banks to pony up and provide similar services at lower fees and interest rates).
A "Canadian regulatory regime for the industry may provide a compromise solution on which all stakeholders can agree" is unlikely to include many of the high-risk, low-wage customers of these companies. It's more likely a game plan to legitimize these companies and their "usurious rates of interest." Somehow I think that corporate interests will win over individual concerns here. After all, who pays more into party coffers and election campaigns - the vulnerable, low-wage victims or the companies that make profits from them?
Do people borrow at these rates for necessities? Food, rent, clothing? That would be scary. Or do they borrow for non-essential things - tobacco, alcohol, game consoles, techie toys, entertainment? That's scarier. Either way, using these companies means you're making $10 an hour, but spending like you're making $12.50- $13.50 - or more. You can't win.
