High-interest loans: Why Canadian borrowers are still taking on the steep commitment

These days, Donna Borden is in a good way—financially and otherwise. But three years ago, she was fed up and desperate.

After taking out a $10,000 instalment loan from an alternative lender in 2005, the single mother from Toronto found herself in a situation where she still owed $7,500 after 10 years—and that is after paying $25,000 on the loan.

Although the initial interest rate had been set at 28.99 per cent, the lender had refinanced and changed the terms on the loan several times without her consent.

Rather than keep paying, Borden finally stopped. “I realized there was no way I was going to pay them off,” she says. Instead, she became a spokesperson for the Association of Community Organizations for Reform Now (ACORN), an anti-poverty group where she now runs a campaign against predatory lending.

Borden’s story is not unlike that of many borrowers who, caught in a squeeze, end up turning to the alternative (sometimes called “fringe” or “shadow”) lending market, where they can find payday, instalment and other types of loans, usually at exorbitant interest rates. While payday loans are provincially regulated, instalment loans are unregulated. This means that, while interest rates cannot exceed 60 per cent, lenders are effectively free to change terms and add fees and other charges almost at will. (See sidebar)

A PERVASIVE PROBLEM

Predatory lending affects Canadians of all financial backgrounds. As Doretta Thompson, CPA Canada’s director of corporate citizenship, points out, “These loans are primarily used by those with low to moderate incomes, but well-earning Canadians are also accessing them. Most borrowers are aware that the loans they are seeking are expensive but either have no other options or are unaware of the true cost of borrowing.”

Despite the high costs, it seems more Canadians are turning to these types of loans. Doug Hoyes, CPA, a Licensed Insolvency Trustee with Hoyes, Michalos & Associates Inc., has certainly found this to be the case in his firm. “In 2011, only 12 per cent of my clients owed money on a payday loan at the time of filing with us,” he says. “But that number has grown to 31 per cent now.” He also says seniors are turning to payday loans in ever-increasing numbers—a trend that his firm calls “scary.”

SLOW PROGRESS

Borden says that since she joined ACORN, considerable progress has been made in raising awareness. “But there is still a long way to go,” she adds. The organization has come out with several reports and a policy paper. And with its fair banking campaign, it is seeking to put an end to predatory lending. Among other demands, it would like to see the criminal code amended to reduce the maximum interest rate to 30 per cent from 60 per cent.

Already in Quebec, the maximum interest that can be charged is 30 per cent, which, as Borden explains, means there is no payday loan industry in the province. And Alberta and Ontario have both set the maximum that can be charged on loans to $15 for every $100. In Ontario, as Hoyes notes, instead of just saying “$15 on a hundred”, payday lenders must reveal the actual interest rate. “I’m in favour of that, because with more knowledge it is more likely that consumers can make an informed decision.”

Borden agrees. “When talking to the lender, I thought I was asking the right questions, and I was getting answers. But they were obviously false. Now, I can’t be sure someone won’t come knocking on my door 10 years from now, looking for repayment.”

FOR MORE

CPA Canada offers budgeting tools and resources, as well as free education sessions, through its Financial Literacy Program. You can also join the Mastering Money conference in November or use CPA’s Money Management worksheets to find ways to better manage your finances.