Payday loans under the microscope – again

Canada’s largest province is taking another look at the payday loan industry.

The review comes just five years after the government of Ontario clamped down on the quick-and-easy money business – ushering in major changes in provinces across the country.

The governing Liberals say the move is in response to technological changes in the industry that have made lending cash at excessively high rates even quicker and easier. They specifically mention online transactions and loan approvals over smartphones.

A sluggish economy and tighter lending restrictions from conventional banks have been a boom for payday loan operators. The industry has gone from the main street of every Canadian town to every PC, tablet and smartphone.

There’s really nothing new about payday loans, though. Here’s how they generally work: To qualify all you need is a job, a bank account and a pulse. The borrower writes a post-dated cheque for the amount borrowed, plus interest and fees, dated for the next payday. When payday comes the cheque is cashed – assuming the money is there. If the money is not there the borrower owes the lender even more, which accumulates interest.

The exact terms and conditions vary from province to province but in Ontario, for example, the maximum amount that can be charged by law - including interest and fees - is $21 for every $100 borrowed. If the loan is not repaid when payday comes around, interest on each $100 can not exceed 90 cents a week for the first 13 weeks and 50 cents a week afterward.

If you compare that charge of $21 per $100 borrowed to a conventional loan averaged out over a year, the interest exceeds 120,000 per cent. Canadian Payday Loan Association president Stan Keyes defends the high cost of borrowing saying the comparison is unfair – like averaging out a two night stay in a luxury hotel and comparing it with a one year apartment rental. You pay for the convenience, he says.

The CPLA claims its membership of 764 payday loan operators services 2 million Canadians a year and the average loan is $280 for a period on ten days.

The Ontario government says inquiries about payday loans have increased tenfold since 2008 and also wants to investigate whether the regulations imposed five years ago are being followed.

The government is not disclosing exactly what prompted the review but it has suggested there could be a problem tracking payday loans. It wants to look into the possibility that individuals could be getting multiple loans – sinking them deeper in debt and piling on higher interest charges.

Payday loan operators will be well represented during the Liberal government review. CPLA president Stan Keyes is a former Liberal Member of Parliament and served as a cabinet minister responsible for Revenue Canada and the Canadian Mint.

The point is, don’t expect much to come of the review. At the end of the day payday loan operators are legitimate businesses that supply a demand, much like tobacco companies.

Where tobacco and payday loans differ is in the arena of public education. Several high profile studies have been released on the dangers of tobacco and each carton of cigarettes is required to display a graphic warning.

Looking at record high debt levels in Canada, it is clear not enough is known about the dangers of compound interest. Payday loans are often marketed toward youth as the ticket to a carefree lifestyle, yet many are unaware of cheaper alternatives that involve building long term credit.

Perhaps Ontario would be better off introducing credit 101 to its high-school curriculum.