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.”
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.”
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.
INSTALMENT VS. PAYDAY LOANS
|While instalment and payday loans are both classified as unsecured loans, there are differences.
It is a short-term loan that is usually paid back in one lump sum. The borrower’s next pay cheque acts as security for the loan.
Payday loans are regulated under provincial law; each province sets interest rate limits and other requirements, with a maximum cost of $15 to $25 for every $100 borrowed, depending on the province. Because of the short duration of the loan, this actually equates to an annual percentage rate (APR) of 391 per cent to 652 per cent. It is estimated that there are 1,500 payday loan outlets across Canada.
As Doretta Thompson points out, most payday loans are relatively small in value and used for necessary expenses such as emergencies, utilities and rent. “But loan repayment can cause a snowball effect, forcing the continuous use of multiple payday loans,” she says.
Thompson also notes that a market trend report on payday loans issued by the Financial Consumer Agency of Canada showed that more than half of borrowers were not aware that their payday loans cost more than maintaining an outstanding balance or taking a cash advance on a credit card.
This kind of loan is paid back in a series of payments, or instalments. As Doug Hoyes explains, the interest rate on these loans cannot exceed 60 per cent under the criminal code. That is lower than a payday loan. However, these loans tend to be paid off over a longer period of time than payday loans. “So in that sense, they prolong the agony,” he says.
Hoyes also points out that neither kind of loan is good. “A better option would be to deal with the debts by filing a consumer proposal, so there would be no need to resort to a payday loan.”
Naturally, however, it’s even better to be able to avoid high-debt situations in the first place. As Thompson says, “For us, stories of predatory loans really highlight the need for Canadians to prioritize building emergency savings. We encourage all Canadians to build a budget and focus on how to make the most of their money. It is never too late to start being money smart.”