Payday loans are playing a role in a growing number of insolvencies in Ontario, according to bankruptcy trustee Hoyes, Michalos & Associates Inc.
Four out of 10 insolvencies in the province were driven by the short-term, high-interest borrowing practice last year, a report by the firm found. The increase flies in the face of legislative changes aimed at reducing consumer risk among heavily indebted Ontarians.
“Regulatory changes to lower the cost of payday loans and lengthen the period of repayment are not working for heavily indebted borrowers who feel they have no other option but to turn to a payday loan,” licensed insolvency trustee Ted Michalos wrote in a news release on Tuesday.
“And the industry itself has just adapted, trapping these consumers into taking out more and even bigger loans, adding to their overall financial problems.”
The loans are designed to help borrowers bridge between pay cheques. Most are meant to be repaid in two weeks, however the terms can vary. Lenders typically hold a personal cheque from the borrower for the amount of the loan, plus fees, in return for cash.
The average insolvent payday loan borrower owed $5,174 on an average 3.9 different loans, the report found. They also owed two times their total monthly take-home pay, with interest rates ranging from 29.99 per cent to 59.99 per cent for longer term loans, and 390 per cent for traditional payday loans.
Hoyes, Michalos & Associates found the rate of insolvency among those with payday loans has been on the rise since 2011. The average amount borrowed is also increasing, climbing 19 per cent to $1,311 in 2018, versus the previous year. Fifteen per cent of loans were for $2,500 or more, up from nine per cent in 2017 and barely one per cent in 2011.
Last year, the Ontario government responded to high borrowing costs by lowering the amount lenders can charge to $15 per $100 borrowed. In 2017, it was lowered from $21 to $18 per $100 borrowed.
As of July 1, 2018, lenders cannot offer more than 50 per cent of net income per loan, and must spell out the cost of borrowing as an annual percentage rate in advertising or agreements. Lenders are also required to offer an extended repayment period if borrowers take out three loans within a 63-day period.
Money Mart, a payday lender with more the 550 branches across Canada, objects to the government’s intervention. The company asks its customers to complain to the Ontario Ministry of Government & Consumer Services on its website.
The province also recently gave municipalities more control over where payday lenders can set up shop. The industry has long been criticized for targeting low-income individuals.
Doug Hoyes of Hoyes, Michalos & Associates said the payday lending industry has responded by moving online, and offering a wider array of quick and easy products to lure more borrowers.
“We see the use of larger fast-cash loans increasing, to the detriment of borrowers,” he added in the news release. “At the same time, heavy users circumvent rules to limit repeat use by visiting more than one lender, and there are no safeguards in place preventing them from doing so.”