COVID: Payday, installment loans on the rise due to pandemic

Toronto –

The pandemic has prompted more Canadians to seek high-yield loans, a new survey has found, and advocates are urging the Feds to lower the maximum interest rates lenders can charge.

ACORN Canada, a community group serving low- and middle-income Canadians, conducted the survey among its members. Of the 439 people who took the survey between November 2021 and January 2022, 113 said they took out an expensive loan, such as a payday loan or an installment loan, because of COVID-19.

Among those respondents, a quarter said they had taken out a high-interest loan 10 or more times since the pandemic began. More than half also said they first applied for a loan from a traditional bank or credit union but were turned down. In addition, 83 percent said they need the loans to cover day-to-day expenses.

“When people have to borrow for basic expenses like rent, groceries, phone, internet… it’s kind of alarming,” Peter Jongeneelen, a spokesman for ACORN in New Brunswick, told CTVNews.ca in a phone interview Tuesday.

Installment loans are usually offered to borrowers with interest rates between 30 and 60 percent and are intended to be repaid within a set period of time. Payday loans are typically $1,500 or less for a period of 62 days or less and can have interest rates as high as 548 percent, depending on the province.

These loans are offered by alternative lenders and are typically accessed by people who may not be able to access loans from traditional banks and credit unions due to poor credit history, low income, or a combination of both.

“They just don’t qualify (for loans from banks) because their credit rating isn’t good enough,” Jongeneelen said. “They’re forced to do whatever it takes to keep a roof over their heads and keep food on the table.”

Suzette Mafuna was one of the ACORN members who took out an installment loan. Mafuna relies on old-age security and went back to university in 2019 to find a good job and achieve financial independence. With rent, phone bills, debt and other expenses piling up, she took out an installment loan to pay her school bills in the early months of the pandemic.

But with fees and interest, she now owes an additional $8,000 in addition to her $6,000 principal.

“Nobody understands what it’s like to be an average Canadian or to struggle to make ends meet. These guys sitting in these offices are all rich. You never lived our life. It’s all about money,” she told CTVNews.ca over the phone Monday.

The winding-up of government COVID-19 supports like CERB has been cited as one of the reasons lower-income Canadians turned to high-yield loans. More than half of the respondents reported that their financial situation has deteriorated due to the pandemic and they still need financial support.

“CERB has been great and changes made to EI have been great. But then they ended. Things like the lockdown performance, the caregiver – they were a little underwhelming. We are still in the pandemic,” Jongeneelen said, adding According to Statistics Canada, Canada lost 200,000 jobs in January 2022 after the Omicron variant emerged.

CRIMINAL INTEREST RATE SHOULD BE LOWERED: REPORT

Canada’s Penal Code prohibits lenders from setting annual interest rates higher than 60 percent. ACORN says the federal government should lower the penalty rate to 30 percent.

But below Section 347.1 of the Criminal CodePayday loans are exempt from the maximum interest rate restrictions as long as the states introduce their own regulations.

In Ontario, BC, Alberta, New Brunswick and PEI, payday lenders can charge a maximum of $15 for every $100 loaned in a two-week period. This corresponds to an annual return of 391 percent.

In Manitoba and Saskatchewan, the maximum fee is $17 per $100, or 443 percent annually. In Nova Scotia, payday lenders can charge $19 per $100 (495 percent annually), while lenders in Newfoundland and Labrador can charge $21 per $100 (548 percent annually).

Quebec is the only province that has effectively banned payday loans. Interest rates on all loans in the province are capped at 35 percent. ACORN is also urging the federal government to follow Quebec’s lead and remove the Section 347.1 exemption for payday loans.

In last year’s general election, the Liberals pledged “to take action against predatory lenders by lowering the criminal interest rate.” This engagement was also identified as a priority by Deputy Prime Minister and Treasury Secretary Chrystia Freeland Letter of mandate in December 2021.

Adrienne Vaupshas, ​​spokeswoman for the Freeland bureau, told CTVNews.ca in an email statement that the federal government will soon begin consultations on lowering the crime rate, with more details “to be made available in due course.”

“Too many low and modest income Canadians are forced to rely on high-yield short-term borrowing to make ends meet, leaving them in a cycle of debt. The government is committed to cracking down on predatory lenders by lowering crime rates,” she said.

But the Canadian Consumer Finance Association (CCFA), the industry group that represents financial institutions that offer payday and installment loans, says these changes could hurt low-income Canadians who otherwise would not have access to credit from traditional financial institutions. The CCFA argues that this could discourage borrowers from seeking credit from illegal, unlicensed lenders.

“Installment loans are expensive to provide and often risky. The borrower’s creditworthiness is an important factor in determining the interest rate on an installment loan, and in fact, many applicants do not qualify for a loan because of their credit profile,” the group said in an emailed statement to CTVNews.ca on Monday.

“Any reduction in the federal interest rate ceiling will result in Canadians with lower credit scores who previously qualified at the current rate being denied access to credit.”

ACORN is also calling on the federal government to make traditional banking more accessible. Proposals include reducing the insufficient funds (NSF) fee for withdrawals from $45 to $10 and requiring the federal government to guarantee bank loans to low- and middle-income Canadians. ACORN also proposes the introduction of a postal banking system, where the postal service would run a public bank for those unable to access banks.

“It’s annoying that banks don’t seem to have anything that isn’t a priority for low- and middle-income people who need some sort of emergency loan,” Jongeneelen said. “The government must act sooner rather than later.”

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