Payday Loans Not The Real Problem: Consumer Debt Is

payday loans and consumer debt
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Payday loans are expensive. Lenders charge a ridiculously high interest rate and demand repayment in one balloon payment. Inevitably, this traps some payday loan borrowers into a debt cycle. As a result, the Ontario government is reviewing current payday loan legislation and it's considering changes. In today's show, Ted Michalos, my partner and co-founder, joins me to discuss some of the suggested changes, our own recommendations for the government, and which payday loan alternatives to consider before taking out one of these high interest loans.

Conventional wisdom says the following about payday loans:

  • the interest rate is too high, well above the maximum rate of 60% set out in the criminal code of Canada, and this causes a financial problem for payday loan users;
  • people turn to payday loans because they have a low income, can't access traditional credit and need a payday loan to cover necessities like rent, utilities and groceries.

I beg to differ with this wisdom.

While the interest rate is certainly an issue, it is not the real problem with payday loans. The real issue is total existing consumer debt. More specifically, it is the other debt that payday loan users are carrying before they take out a payday loan.

Our Joe Debtor study found that people from all income levels used payday loans. Moreover, 18% of people who filed insolvency had payday loan debt. But it's not the payday loans causing them to become insolvent, it's all the other debt.

The average person my firm helps has almost $60,000 in unsecured debt.

In a recent payday loan study my firm did with Harris Poll, we discovered that 83% of payday loan users had other outstanding loans at the time of their last payday loan. Almost half said they sought a short term or payday loan due to the amount of debt they carry and that a short term or payday loan made it easier to keep up with debt repayments.

Our study also found that payday loan users are borrowing from payday loan lenders, not because they can’t access any other credit but because they have exhausted all other options. To discuss this topic further, Ted and I discuss some of the suggested amendments such as:

  • Limiting the amount borrow to 50% of the next pay cheque
  • Limiting the number short-term loans a person can take out in a fixed period of time.
  • Extending the time a borrower has to pay off the loan.

However, those solutions still do not address the underlying problem of too much debt.

Possible Payday Loan Solutions

We suggest the government mandates that payday loan interest rates should be expressed in such a way that it is more accurate and comparable with other borrowing products, such as the annual interest rate. Our other recommendation is that payday loan lenders should report to the credit bureaus. This will force those with debt to deal with it sooner while rewarding those who pay off their loan with an improved credit score, which should help them qualify for lower interest loans. Our last recommendation is that there shouldn’t be any introductory rates, as this can trap payday loan users into a debt cycle.

Our goal with these recommendation is to lessen the demand for payday loans and lower overall consumer debt which is a better approach than just tweaking the cost of payday loans.

Payday Loan Alternatives

What can you do to avoid payday loans? Well, if you’re looking for a payday loan to pay the rent, you could speak with your landlord to see if they are willing to wait a week or two. Alternatively, you could set up a separate bank account to deposit a portion of your rent into, to help with budgeting, and make that account the one that the landlord takes the rent from. Also, the separate bank account method can also work for other bills such as your utilities.

If you’re borrowing from a payday loan lender to make the minimum payments on your debt, consider getting an overdraft on your bank account or opening a line of credit. If possible, you could borrow from your parents or siblings. Ted adds:

At the end of the day if you find yourself - you really are desperate enough that payday loans make sense, maybe you should be seeking some professional advice about your debt overall. I mean one of the things we specialize in doing is restructuring people's debts.

Deal with the Underlying Consumer Debt

A consumer proposal or bankruptcy can help you deal with your unsecured debts. Either option will get to the root of the problem that would make you seek out a payday loan in the first place: debt. If you're struggling with debt, don't hesitate to reach out for advice. It's always free.

FULL TRANSCRIPT show #92 with Ted Michalos

payday-loan-alternatives-podcastDoug Hoyes: We've had a few shows this year where we've talked about payday loans and I've had guests who've done research on this topic and have given their solutions to what we call the payday loan problem. But what is the payday loan problem? Well, the conventional wisdom is that the problem with payday loans is that they cost too much. The interest rate is very high and that's true. In Ontario the maximum cost of a payday loan as set out in provincial legislation is $21 on every $100 borrowed. $21 doesn't sound like a lot but if you borrow $100 every two weeks and pay back $121 every two weeks all year long, you end up paying $546 in interest, which on $100 loan is an annual interest rate of 546%.

That's a very high interest rate. Many times higher than what you'd pay on a high interest rate credit card. It's a lot higher than the maximum rate set out in the criminal code of Canada of 60% but they can get away with it because there are special exemptions in the law for payday lenders.

So, obviously high interest rates are a significant problem but that's not the real problem with payday loans. What is the real problem? Debt. Let me explain. I know payday loans are a problem because I see it in the statistics we compile from our clients. Last year we released our Joe Debtor study and we found that if people who had a payday loan, when they either went bankrupt or filed a consumer proposal, the average amount owing on payday loans was $2,749. That's not one payday loan, that's an average of three and a half payday loans.In total 18% of people who file insolvency have a payday loan when they file.

Now two years earlier when we did a similar study it was only 12% of our clients, and the average owing on payday loans was under $2,500 so that's a 12% increase in payday loan balances over two years. Male or female, it doesn’t matter. The average payday loan balance is about the same whether you're male or female so apparently we have full equality when it comes to payday loan debt.

And it's not just a problem for what we think of as poor people. The biggest group of payday loan borrowers, 36% of them, have incomes between $2,000 and $3,000 each month. And that's after tax income, I'm talking about. 18% of them are between $3,000 and $4,000 and 9% have incomes over $4,000 a month and yet they're still getting payday loans. Payday loans are a burden on all income levels. Now I said earlier that it's not the high interest rate that's the real problem, it's total debt. The average person my firm helps has almost $60,000 in unsecured debt. So, it's not just payday loans that are the problem, it's everything else.

But how much of a problem is it? Well, I wanted to find out so I hired a big survey company to do a study for us and here's what we found. 83% of payday loan users had other outstanding loans at the time of their last payday loan. Almost half say they seek a short term or payday loan due to the amount of debt they carry. 46% of those who obtained a payday loan in the last 12 months say short term or payday loan made it easier to keep up with debt repayments. In other words, borrowers are taking out high interest payday loans to assist with making their other, presumably lower interest, debt payments. And of medium and frequent users, and 55% take out more than one loan in the last 12 months, 45% say their debt load increased after they got their payday loan, with only 14% saying their debt load decreased. Short term and payday loans may solve a short term cash flow crisis but they're adding to the overall debt burden of Canadians.

It's incorrect to assume that payday loan borrowers are obtaining payday loans because they can't borrow from traditional lenders. Well, the study we just did proves that that's not true. Our payday loan survey indicates that the average unsecured debt owed by a borrower who obtained a payday loan in the last 12 months is $13,207. And for frequent users their total unsecured debt is over $17,500. And again, these are not people who are bankrupt or filing a proposal this is a separate study we did of people who are not bankrupt or filing a proposal. That's the level of payday debt and other debt that they're carrying. Payday loan users are borrowing from payday loan lenders, not because they can't access any other credit but because they have exhausted all other options.

So, why are we discussing this now? Because the Ontario government is considering possible changes to payday loan legislation in Ontario and back in May we made a submission to the government with our thoughts on changes to payday loan legislation. Our comment was that it's not the interest rate alone that's the problem, it's your total level of debt. But what's the solution? Well, that's what we'll discuss next from after this break right here on Debt Free in 30.

Doug Hoyes: We're back and I'm joined by Ted Michalos to discuss our recommendations for changes to payday loan legislation in Ontario. As I said before the break, I'm of the opinion that the cost of borrowing does not have a significant impact on the borrowers decision to utilize the services of a short-term lender.

Whether the cost of the loan is $21 per $100 or $19 or $15, would not significantly influence the decision of the typical debtor we see, with one caveat, I mean one time professional loans I guess when, sorry, one time promotional loans, when payday lenders offer a drastically reduced borrowing cost as an introductory rate, they may cause some borrowers who are sensitive to interest rates to consider a short-term loan. So, Ted I'm going to bring you into the conversation here. We've reviewed a number of possible solutions and we're not really ready to recommend these, we're not opposed to them, maybe you can give me your thoughts on three of these ideas. The first one being limiting loan sizes based on income. So, on Saskatchewan I believe the limit is 50% of the next pay cheque. Would that make any difference do you think?

Ted Michalos: Well, as long as it's a limit on the total amount of payday loans you can borrow. I mean intuitively somebody gets a pay cheque that's $1,500 and saying you can borrow up to $750 makes a certain amount of sense unless they borrow from three of four different places because then your 50% of your pay actually works out to 300% of your pay. And you're in a hole that you can't dig out of.

Doug Hoyes: Well and that's why one of the second recommendations that we considered and sort of said nah, it may or may not work is the limit on the number of short-term loans a borrower can obtain in a fixed period of time. So, that's really what you're saying.

Ted Michalos: Yeah. The trick with that of course is being able to keep track of all the different places that they've taken the loans from. So, that will lead us into another recommendation of keeping track of these things. How do I know that I borrowed from Company A, Company B and Company C?

Doug Hoyes: Yeah and how does the payday loan place know that you've done that? So, we'll talk about that as we go on.

The third possible recommendation and this is actually contained in the draft legislation is the extension of the time permitted for repayment. The thought being well if I've got to pay it back in two weeks, I've got to come up with a lump sum, a balloon payment in two weeks. If I could pay it back over let's say two or three months, then maybe that eases the burden on me. Do you think that's a good idea, a bad idea, what do we need to consider there?

Ted Michalos: When I first heard of this, it made some sense to me. They were saying okay so we paid the high interest rate for a couple of cycles on my loan so now I can't get out of it so they have to give me a longer period of time. The interesting thing is that if they don’t change this legislation and they were to allow you that longer period of time, it doesn’t fall under a payday loan anymore, it falls under other types of borrowing and then the usury code or the criminal code come in at 62% interest per year or whatever the number is. So, I think that there's an interesting little game afoot here that I'm not enthusiastic about. 'Cause it doesn’t solve the underlying problem, you still got more debt than you can deal with.

Doug Hoyes: And that's the key, that's the whole key to it. The problem with payday loans isn’t just the interest rate. Yes, it's very high, It's all the other debt that you've got. You're getting a payday loan as the last resort. You've already got a bunch of other debt, so I mean I think we're in agreement these alternatives we just talked about may ease the burden on borrowers a little bit but they're really treating the symptoms, not the underlying problem. So, I mean limiting loan sizes may simply make you go to multiple lenders simultaneously.

Ted Michalos: Well and remember one of the trends we've seen is there are more and more people doing these online what do they call them, instant loans, instant cash things. So, they're gravitating from payday loans to these six months loans anyway. So, I don’t know that it makes any sense.

Doug Hoyes: Yeah and obviously it's not reducing your total debt. It's actually making it worse. So, if those solutions aren’t perhaps the perfect solutions, what are some things that potentially will work? So, one of the things that we've talked about is the cost of borrowing. So, our clients, and I think you'd agree with this, don’t fully appreciate what the cost is, the payday loans are advertised as $21 on $100.

Ted Michalos: Right. So, everyone assumes that's 21% interest.

Doug Hoyes: And it isn’t, it's actually well 546% interest if you're doing it every two weeks for the life of the loan. So, our recommendation then is a more accurate and comparable way would be to disclose the annual borrowing cost. Does that make sense?

Ted Michalos: Yep. I mean it may not make a huge difference because the reason people say they take payday loans, they're lying to themselves is easy access, it was easy to get the money when I needed it. So, the fact that we're going to hit them over the head with this 546% interest is good. They've got to be much more aware. It's not 21% that they're deluding themselves with. But because they are desperate for the money when they do it, I don’t know that that by itself will be enough.

Doug Hoyes: Yeah. And how do we actually do that in practice? What is the annual interest rate? So, if I'm going to pay it back in 10 days or 14 days then obviously the annual interest rate is different. I think you'd have to come up with a standard. It would have to be based on if it was a two week loan or a 10 day loan or a 14, whatever and base it on that. But it's a very simple thing I think once those mechanics are worked out to say we have to disclose the cost of borrowing as an interest rate.

Ted Michalos: I can picture the poster on the wall. So, the first line is if you repay this by your next payday then it's $21 per $100 and so your loan would cost this. And then if you are - you renew it a second period, the total cost of borrowing is now this. The industry probably knows that the average person rotates or revolves their loan three or four times so the total cost would be this. And if you did it for a whole year it would be this. So, the number just keeps getting bigger and bigger. I think that might have some impact.

Doug Hoyes: Yeah. And the credit card companies already have to do this.

Ted Michalos: That's right. They were forced to do this a couple of years ago. They have to tell you it will take 395 years at $1 a month to pay off your debt.

Doug Hoyes: That's right. So, we're not talking about something that is that far removed. In fact -

Ted Michalos: Not onerous.

Doug Hoyes: No and we're putting them on a level playfield.

Ted Michalos: Correct.

Doug Hoyes: If the credit card companies have to do it then why don’t the payday loan companies have to do it?

Ted Michalos: And I think people will still use the service because they desperately feel they need it. And again, they fall back on well it was so easy to do.

Doug Hoyes: Well and as I said in the first segment about our study, people are getting these payday loans in part to pay the interest on their other loans.

Ted Michalos: Correct.

Doug Hoyes: Which is a horrible thing to think about, I've got a credit card at 29% and I'm getting a payday loan at 546%.

Ted Michalos: The example that drives me crazy is the pensioners. So, the seniors most of them will do anything to make their minimum payments on their debts. And so once they start into this payday loan cycle because their pension cheque doesn’t come through for another three weeks, it's just a treadmill that they can't get off.

Doug Hoyes: It's impossible. And think about it, if my pension cheque is $2,000 and I borrow I don’t know, $2,000 or $1,800 or $1,500 and I've got to pay back $1,600 or $1,700 or $1,800 what do I do next month then?

Ted Michalos: Right. Well, you're right back on the horse.

Doug Hoyes: It's totally impossible. So, okay so we both agree that disclosing the cost of borrowing as an annual interest rate just like the credit card companies have to do, sounds like a -

Ted Michalos: It's got to help.

Doug Hoyes: It's got to help. It certainly can't hurt and it's an easy change to make. Our second recommendation has to do with credit bureau reporting. So you kind of alluded to this a bit earlier that if it was possible to know how many different payday loans someone had, then perhaps there could be rules in place about kiting loans, getting five different loans at the same time. I think that - so, it may be a detriment to borrowing but I think even more importantly than that if these loans were reported to credit bureaus and people paid their loans off that should improve their credit scores.

Ted Michalos: One would hope.

Doug Hoyes: So, then does it make sense then to require bureau reporting for payday loans? What are the downsides to that? If you were the payday loan industry why would you not want to do that?

Ted Michalos: Well, because the lender has to become a member of the various credit bureaus and there are fees associated with that. Presumably they'll pass those on to the customer because that's what they do with every other fee they have.

Doug Hoyes: But if the cost of borrowing is fixed then that becomes a fee.

Ted Michalos: It's an added cost.

Doug Hoyes: Yeah, that the payday loan place has to absorb.

Ted Michalos: Now admittedly payday loans, I mean it's a profitable business. There wouldn’t be so many of them if people weren’t making money. So, okay it just may be that's a hit they have to take on their bottom line.

Doug Hoyes: Yeah. And I guess if the loan rate is going to stay at $21 on $100, it can't cost that much to be reporting to credit bureau. It's not like it's costing you $50 a loan or something like that. It's all done electronically. And perhaps then both parties benefit from that. The payday loan place has more information to perhaps decide if they really should be lending to the person or not. And the borrower is actually being helped because perhaps their credit rating improves.

Ted Michalos: My only fear is that once you put all these things in place it may recreate or enhance the underground payday loan market, which was, you know, mine name's Guido and I'll loan you $50 until payday. And if you don’t pay me something bad will happen. That's a risk.

Doug Hoyes: And that's always been our worry about saying okay I mean the government could pass laws to totally eliminate payday lenders.

Ted Michalos: Right. But they've always been in the workplace since the industrial revolution. People have for whatever reason run out of money before payday and there's always been someone willing to give them a short-term loan and so better to have it in the daylight than in the dark.

Doug Hoyes: And that's really why we're a little bit queasy about saying let's just put these guys out of business.

Ted Michalos: There's a demand for the service, people have always needed this service. So, let's put it where we can see it.

Doug Hoyes: Which is why our approach has been is there a way to lessen the demand for the service?

Ted Michalos: Correct. And make people aware that it - this is what it costs to use this service. If you go and do it with your eyes open you've got less of an excuse.

Doug Hoyes: Yeah I mean we're not out here saying you shouldn’t use a credit card even though they have very high interest as well.

Ted Michalos: Right. Just be very careful when you use it.

Doug Hoyes: Yeah, if you're informed you're in better shape. Now one of your pet peeves is promotional rates or introductory rates.

Ted Michalos: I really hate this stuff.

Doug Hoyes: So tell me why you really hate those things? What are they and what's the problem?

Ted Michalos: So lots of promotion from payday lenders that say come in for your first loan and we'll only charge you $10 on the $100 or just the administrative fee. It'll be cheap, cheap, cheap. The issue is of course once you've taken out the first loan, you still have to pay it back. And so if you were short the money in the first place, two weeks from now you're going to be short the money again. And the second loan isn’t going to be at the promotional rate. And the third loan won't be, the fourth loan won't be. It becomes something that you just can't get out from under of. I like to equate this to the sleazy guy hanging around the kid's playground and giving them their first joint or their first shot of crack cocaine. I think it's as evil as that.

Doug Hoyes: So you're not a big fan then I'm guessing.

Ted Michalos: I'm really not a big fan.

Doug Hoyes: If we're equating payday loans to illegal -

Ted Michalos: I've seen too many movies and too much TV I guess. I hope this isn’t happening anymore.

Doug Hoyes: There you go. But yes you're exactly right. Why else would they be giving these low introductory rates?

Ted Michalos: Right. It doesn’t make sense. You don’t lend money for free. You only do it if you figure now I got them hooked.

Doug Hoyes: So if you were writing the laws you would have something that says there can't be low introductory rates? It has to be the same rate you charge all the time?

Ted Michalos: Yep. Or you could - so the first loan can't be cheaper. If anything the first loan should be more expensive. And then perhaps if you need relief later, third, fourth, fifth loan at progressively lower rates, something we sort of discussed earlier. But the first ones got to be the most expensive one, the hardest one to get.

Doug Hoyes: Yeah. And that has actually been proposed, that maybe the first loan is $21, the second one in a 30 day period is 19, the fourth one and third one and so on. And that would perhaps ease the burden down.

Ted Michalos: Well, we get back to if you make it too hard or too difficult to get the first one then again maybe we drive it underground or they find some other means. I mean the whole thing is a little scary when you think about it.

Doug Hoyes: Yeah and you and I have thought about this many times over the years. And I think it is not as simple as an issue as you would think. It's not as simple as yeah let's just outlaw them.

Ted Michalos: Right 'cause that is not going to solve the problem.

Doug Hoyes: Like you said it drives people underground or somebody else, you know, steps in.

Ted Michalos: Think of prohibition. Did it do away with beer and alcohol? It didn’t last for very long. Well, it was never in this country.

Doug Hoyes: It might have been but you're right. You find alternate sources of supply and as a result it doesn’t solve the problem. So, summing it up then if you are the head of the government of Ontario and have the ability to pass whatever new laws you want, would disclosing the annual percentage rate be the most important thing you would pick?

Ted Michalos: I think that's an excellent way to start because it's levelling the playing field. There's complete disclosure. You can't - no one can honestly say oh I thought it was 21%, I was deluding myself that it was a deal. It is not a deal in any way shape or form.

Doug Hoyes: And so it would have to be on the form you're signing. They would have to put posters up in the place.

Ted Michalos: Yep, it's got to be right in the damn wall so when I'm looking the clerk in the eye and I'm signing the forms I see it right in front of me. No, it's not 21%, it's 546% if you take a whole year. And you may be one of the people who takes a whole year, just keep that in mind.

Doug Hoyes: And so that way - and even if it's a two week loan if you have to keep re-borrowing to repay it then yes it does take a loan. And as we saw in our study, payday loans do not reduce your total debt. In fact for a significant number of people they have more debt than when they're done. So, even when they pay off the payday loan, they end up with more debt because of all the interest that they're paying.

Ted Michalos: Right. I mean it's literally the final straw that eventually will break the camel's back. So, you already own money to all these other things. You can't access credit anywhere else. You're now at the worst place to access credit, the highest cost of borrowing. And so once you've tapped into that, how could that possibly make things better for everything else?

Doug Hoyes: Yeah, which is why, we'll talk about this in the final segment and we're always encouraging people to look at other alternatives 'cause there are other alternatives. So, and then requiring the credit reporting that makes sense as well and we don’t know the exact cost but we don’t think that it's going to be that onerous that it's going to make that big a difference.

Ted Michalos: Again, I think it would be helpful that one you're right it would help establish a credit history for people that are having trouble accessing mainline or more reasonable price credit. And the second is it could be used as a limiting tool so you can't get - well, what's the limit? I think I had a client who had more than 17 payday loans. I mean he was making $2,500 a month and his payday loan total was 12 or $13,000 like it just - it boggles the mind, how is that possible?

Doug Hoyes: And that wasn’t our record.

Ted Michalos: No, it was my record.

Doug Hoyes: Our record I think up into the $30,000 range of payday loans from multiple different places. And you're right with the internet now there are so many online places you can go that even if the Ontario government passes rules if I'm borrowing online from some place in England or the United States, how do you specifically regulate that? So, I think ultimately it comes down to people being aware of what they're paying, looking at their other options and coming up with solutions for them that way. Because whatever the government does there will be some way to get around it.

Ted Michalos: Correct, there always is.

Doug Hoyes: There always is. So, okay well I appreciate that. We're going to take a quick break and then we're going to come back with a final segment where we're going to talk about specific actions you can take if you've already got payday loans and are having trouble servicing them. We'll be right back with the Let's Get Started Segment. You're listening to Debt Free in 30.

It's time for the Let's Get Started segment here on Debt Free in 30. I'm Doug Hoyes and I'm joined by Ted Michalos and we're talking about payday loans. Specifically we've talked about a couple of studies that we've done that show that people with payday loans also have a lot of other debt. That's why in a lot of cases they're getting payday loans. It's not just to pay their rent next month. It's to service the debt they've already got so debt is a significant problem.

So, Ted, in the Let's Get Started segment we talk about practical advice so before I go and get a payday loan, what are they practical things that should be going through my mind specifically with regard to alternatives? What else can I be doing instead of getting a payday loan?

Ted Michalos: Well, let's view two different scenarios for why you're getting the payday loan. So, one of them is the example you just gave, my rent is due. Well, the practical solution is go talk to the landlord and see if they'll wait a week or two weeks even if you have give them a little bit extra to pay your rent. That's a better solution than getting a payday loan at 546% interest, that's a treadmill that you may not be able to get off.

Doug Hoyes: And that's something people don’t think about. So, yeah of course your rent is due on the first of the month, that's when your landlord wants it but if you are three days late because that's when your next pay cheque comes in, are you going to get evicted instantly?

Ted Michalos: Well, on top of that I know people now that have asked their landlords they pay rent with every pay cheque. So, they - it was always a problem for them to come up with the large sum at the end of the month so now they pay half on the 15th and half at the end of the month or every two weeks when they get paid. And that works better for them because budgeting is a challenge.

Doug Hoyes: And that may be hard if your landlord is a big huge corporation and you're in some big tall apartment building. But if you're renting from the lady upstairs then she may be fine with that. And even if your landlord won't do that, you can set up a separate bank account, put the money in every two weeks and that's where the landlord takes the money.

Ted Michalos: And so this kind of solution will work for all kinds of things, landlord, the utilities, that sort of stuff. If your issue is you're borrowing 'cause of debt and you're having problems making your minimum payments then we really need to investigate some other things. First and foremost have you looked at an overdraft on your bank account or perhaps getting a line of credit?

Now we know from our personal experience that by the time most people get into payday loans they've already exercised all of these options but there is a portion that haven’t. So an overdraft you've always been told is very expensive. It's 29% interest. 29% interest is a hell of a lot better than 546. So if you haven’t got one look into that.

Doug Hoyes: Yeah, look into all options is really what we're saying. So, if your parents, if your brother can loan you the $500 you need to cover rent than that's probably a better option than a high interest payday loan. Payday loan places are very friendly. They're easy to deal with. You walk in, they're happy you got your money really quickly, banks are a pain to deal with. There's nobody to talk to, everybody's a sales person, you got to fill out all sorts of forms. But what you're saying is that's something you should still investigate first before going for the high interest option.

Ted Michalos: Do it first, that's right. And at the end of the day if you find yourself - you really are desperate enough that payday loans make sense, maybe you should be seeking some professional advice about your debt overall. I mean one of the things we specialize in doing is restructuring people's debts. And we'll honestly tell you if alright, you're in enough trouble that maybe we should be looking at something called a consumer proposal or perhaps even personal bankruptcy but the majority of the people that we talk to actually just need some sound financial advice. You need to be handling your money differently to get over a hump.

Doug Hoyes: So, if the reason I'm getting a payday loan is because I've already got $20,000 worth of other debts and I'm having trouble making the payments on that the solution is not to get a payday loan, the solution is to deal with those other debts.

Ted Michalos: Correct.

Doug Hoyes: Now do consumer proposals work for payday loans?

Ted Michalos: Well, certainly they do. A payday loan is like any other debt in the eyes of the law. It's an unsecured debt, if you don’t pay it they don’t have the right to come and take your house, your car, your - they can't garnishee your wages without taking you to court. So, in that respect it falls into the same category as a credit card or income taxes or anything along those lines.

Doug Hoyes: Well and just on that point about not being able to garnishee your wages without taking you to court, what a lot of payday loan companies will do is have you sign a voluntary wage assignment. But that's not really enforceable if you decide to unvolunteer it, is that correct?

Ted Michalos: If you were to call your payroll department, your HR people and say you know what? I withdraw my consent, they legally can't deduct it from your pay. In fact most payroll departments these days won't implement that procedure anyway. Because there's a cost to your employer, they don’t want to do it, it's a pain in the well, something.

Doug Hoyes: But again this is where you've got to be proactive and actually talk to your employer. Now if your payroll lady says I've got the piece of paper, I'm taking it off your cheque, well unless you want to have a fight with your employer it has to be dealt with. But again the point is there are other solutions, a consumer proposal or a bankruptcy being one of those. And I guess the upside in a consumer proposal is the payday loan person isn’t the one who's going to decide it.

Ted Michalos: Correct. I mean if you think about it, even if you're one of the extreme cases where, you know, it's 10 or $11,000 worth of payday loans, probably that person has 40 or $50,000 worth of credit card debt. The way a proposal works is, a the majority of the dollars you owe have to agree. The payday loan guy may have no interest in participating but the credit card companies will happily agree to 30%. And so they're forced into the same solution. It deals with all your debts, it gets to the root of the problem as opposed to the symptoms, which is all a payday loan ever does. It buys you time.

Doug Hoyes: And there you go. So deal with the root of the problem. In a consumer proposal, the creditors get one vote for every dollar that's owed. It's very rare that the payday loan people are the decided vote. It's usually the other creditors so usually there is a deal that can be made.

Ted Michalos: Right.

Doug Hoyes: That's an excellent way to end it. Deal with the underlying problem, which is the debt. Thanks for being here again Ted. We're going to take a quick break and wrap it up. That was the Let's Get Started segment right here on Debt Free in 30.

Announcer: You're listening to Debt Free in 30. Here's your host Doug Hoyes.

Doug Hoyes: Welcome back. It's time for the 30 second recap of what we discussed today. On today's show Ted Michalos and I discussed the biggest problem with payday loans. It's not the high interest rate, it's the level of other debt people have when they get a payday loan. That's the 30 second recap of what we discussed today.

As we discussed on the show, we recommended that the Ontario government require payday loan companies to disclose the annual interest rate on a short-term loan. And we believe they should also report short term loans to the credit bureaus. Our most important advice however is for anyone considering getting a payday loan. If the reason you're thinking of getting a payday loan is because all of your other debts are too high, the solution is to deal with the real problem, which is your other debts. Eliminate those debts and there may be no need for a payday loan.