While banks are cutting their lending rates, many payday lenders are still charging as much as possible
Jodi Dean has seen firsthand what a debt spiral can do to a family: stress, uncertainty, and years of reliance on high-yield credit.
Now that the COVID-19 crisis is putting a million Canadians out of work, Dean has a clue where some of the most vulnerable will be paying their bills.
“I guarantee if you go out on the first of the month you’ll see them lined up with the payday lenders,” she said.
“This is going to be terrible.”
Amid the pandemic, payday lenders across Toronto are still open – a must-have service for those in need of quick cash. In the face of growing economic uncertainty, which is reducing borrowers’ ability to repay, some payday lenders are putting stricter restrictions on their services.
Others expand it.
“Here’s the reality – the people who use payday loans are our most vulnerable people,” said Dean, who for the past six years has helped her sister deal with payday debt that consumes up to 80 percent of her income.
“These can be our working poor who have no credit, who cannot go to the bank, who have no resources to pay their bills.”
Payday loans are the most expensive form of loan with annual interest rates of up to 390 percent. In its COVID-19-related online consumer advice service, the federal government warns that a “payday loan should be your absolute last resort”.
But in the absence of financial services aimed at low-income earners, payday loans may be the “only sensible option,” said Tom Cooper, director of the Hamilton Roundtable on Poverty Reduction.
“So they’ll catch you in the payday loan cycle.”
The star called six payday lenders across town to inquire about services available amid the pandemic. The shop windows are still open, albeit with reduced opening times.
Aside from promotional offers for new borrowers, all but one of the lenders still charged the maximum amount allowed. Put simply, that gives an interest value of $ 15 on a $ 100 loan. A cashier at It’s Payday said the interest rate was $ 14 on a $ 100 loan.
Large banks have cut credit card interest rates in half – a move welcomed by many Canadians but not helpful for low-income earners, who often lack access to traditional banking services.
A 2016 survey of ACORN Canada members, comprised of low- and middle-income Canadians, about 45 percent said they did not have a credit card.
“In the last 20 years we have seen bank branches disappear from the neighborhoods for reasons of efficiency. And in their place, the payday loan shops have set up, ”said Cooper.
“Banks don’t easily offer financial products to people on low incomes.”
The COVID-19 outbreak hasn’t changed its policies, according to two cashiers at two lenders, It’s Payday and MoneyMart. It’s payday, for example, no loans to laid off people.
“Right now it’s mostly health and grocery stores (workers),” one cashier said of current borrowers.
Some companies said they were curtailing their offerings: At CashMax and Ca $ h4you, cashiers said their lines of credit – loans that are larger and perpetual than short-term payday advances – are temporarily unavailable.
Meanwhile, a cashier at CashMoney said that payday loan repayments can now be postponed for an additional week due to the pandemic. his line of credit is still available at an annual interest rate of 46.93 percent – the legal maximum for such loans.
Melissa Soper, vice president of public affairs for CashMoney, said the company had, in response to COVID-19, “adjusted its credit insurance models to tighten approval rates and approve its employment and income verification practices for both the store and online loan platforms improve”.
At PAY2DAY, a cashier said that those who rely on “government income” are usually not eligible for credit; that has now changed because of COVID-19.
“PAY2DAY will accept EI as proof of income during this time as we know these people will be back to work in the near future,” said company founder and CEO Wesley Barker, the star.
“There are definitely some legitimate concerns that certain companies are taking advantage of these circumstances by raising prices and doing other unthinkable things as well. However, PAY2DAY has not expanded its services, ”he said.
Instead, Barker said the company “lowered our fees for all new customers during these troubled times, as customers can now get a $ 300 loan with no fees.”
Barker and Soper were the only speakers who responded to the star’s request for comment. The Canadian Consumer Finance Association, which represents the payday lending industry, did not respond to an interview request.
Ken Whitehurst, executive director of the Consumers Council of Canada, said payday lenders feel like a more dignified alternative to traditional banks to some: the likelihood of rejection is lower and borrowers can access money quickly without judgment or guilt relying on family and friends.
In reality, especially during an economic crisis of unknown duration, the practice is predatory, he said.
“Our anecdotal observation is that contrary to what the federal government is currently asking state-regulated lenders to do – namely, that they provide credit relief – this industry appears to be responding with more credit.”
That’s in it contrast to countries like the UK, where not only are lending criteria tightened, but some payday lenders are also completely suspending new loans.
But in Canada, lenders say there is no evidence that the pandemic is generating additional business. Soper said CashMoney has “seen a significant drop in applications and loan approvals and expects this trend to continue until the public health crisis subsides”.
Barker said business on PAY2DAY was also down 25 percent in March.
“When things get back to normal, people will try to catch up as things get more difficult financially and they may need a few extra dollars to get through, and that’s where services like ours can make a big difference,” he said.
“I think any critic of this industry right now is simply trying to encourage a misperception of this industry or to completely ignore the value of these companies, especially during tough times like this,” he added.
Payday lenders are clustered in the lowest-income neighborhoods in Toronto, according to a 2015 study by St. Michael’s Hospital. Since then, the city of Toronto has tightened regulations on payday loans. From 2018 they require an operating permit; At the end of last year, the city announced that it would stop issuing new licenses.
“I think additional regulations need to be put in place,” said Councilor Frances Nunziata (District 5 York South Weston).
“In my opinion, they should be closed completely.”
In an email statement to the Star, a spokesman for the Department of Government and Consumer Services regulating payday loans said the province “continues to examine a variety of options to reduce Ontarians’ debt burden at this challenging time.”
While the city of Toronto has limited the number of payday loan transactions, many lenders are now offering online services as well – a trend before social distancing related to COVID-19 encouraged it.
“Regulating the online payday lending industry is becoming difficult with the dangers ahead. It enables companies to withdraw funds directly from your account, ”Cooper said, which has resulted in borrowers facing charges for insufficient funds.
In addition to shorter-term payday loans, newer services offered by many payday loan companies – like installment loans – can be particularly confusing to borrowers, Whitehurst said.
The federally funded report, based on 93 reviews of Canadian lenders offering installment loans, found that at least one lender exceeded the interest rate limit of the Criminal Code. Others are wrapped in opaque service fees for their borrowing costs.
“It is very difficult to understand what the government thinks about what is and is not criminal lending,” he said.
“There hasn’t been much research or evidence of proactive government enforcement. What worries us then and now is that these forms of revolving credit are becoming mainstream, ”added Whitehurst.
And with it ever fancier advertising and promotional offers.
“They come up with all the polish of big financial institutions in some cases,” he said.
That, says Dean, scares her after seeing a loved one rely more and more on payday loans.
“She just got into this real vicious circle and there was no real way out,” she said.
“The people behind the glass, it’s always an encouragement.”
On a payday loan deal the star called this week, the cashier offered a $ 25 referral credit for bringing a friend; There is no need for paperwork showing earned income as long online banking data is available, she said.
On the other hand, new customers are offered a “$ 300 loan for $ 20,” or half the normal rate, the cashier said.
“Express consent,” she added.
Correction – April 13, 2020: This article was edited from an earlier version in which the first name of PAY2DAY CEO Wesley Barker was incorrectly entered.