The payday loan market in Canada loans an estimated $2 billion each year, serving approximately 4% of Canadian households. Like it or not, payday loans often meet the need for urgent cash for individuals who can’t, or won’t, borrow from more traditional sources. If your hydro is about to be disconnected, the cost of a payday loan may be less than the hydro re-connection fee, so it may be a prudent financial decision in some cases.

As one of Ontario’s largest personal insolvency firms, we see first-hand the devastating financial impact extreme high-interest, short-term loans have on vulnerable borrowers.

This article examines the current state of payday lending in Canada, exploring recent trends, regulatory changes, and the industry’s effect on various demographic groups. By analyzing data from government reports, industry studies, and our annual insolvency study, we aim to provide a comprehensive overview of the current challenges and potential solutions in this contentious financial sector.

Table of Contents

Payday Loan Market Trends and Regulatory Changes

The payday loan industry in Canada operates under a complex regulatory framework, with oversight split between federal and provincial authorities. At the federal level, the Criminal Code sets a maximum annual interest rate which can be charged for most loans. However, provinces have the authority to regulate payday lenders differently, leading to variations in rules and interest rate caps across the country.

In recent years, several provinces have implemented stricter regulations to protect consumers, including fee caps and bans on loan rollovers. For instance, in 2018, Ontario reduced the maximum cost of borrowing from $21 to $15 per $100 borrowed. Similarly, Alberta capped interest rates at $15 per $100 borrowed in 2016.

These changes have significantly impacted the industry landscape. Following the implementation of lower interest rate caps, some provinces saw a significant reduction in the number of physical payday loan locations. For example, Alberta experienced a decrease from 230 stores in 2015 to 165 in 2018, an almost 30% reduction. Lower profitability and the reduction in loan rollovers (and hence a repeat client base) were significant contributors to The Cash Store Financial Services Inc.’s bankruptcy in 2014.

Further regulatory changes are coming. In 2024, the Government of Canada proposed lowering the criminal interest rate to an annual percentage rate (APR) of 35% (the current maximum is an effective rate of 60%, which is equivalent to an APR of 48%). At the same time, they propose to harmonize limits for provincially regulated payday loans to a maximum cost of $14 per $100.

There is a reason for the maxim that nothing happens in a vacuum. While regulations have changed, so too has the industry.

Payday lenders have moved increasingly online. Approximately 40% of payday loans are now obtained through digital platforms. In 2023, 3.6% of Canadians used an online lender or payday loan company. However, this number skyrockets to 22% for renters and 16.7% for mortgaged homeowners if they were behind on bill payment, a predominant customer base for payday lenders.

As regulations tightened limits for payday loans, payday lenders moved into alternative markets. Payday loan companies began offering larger, longer-term loan options, including lines of credit and installment loans with longer repayment periods. Ranging from $1,500 to as high as $15,000 or more, they carry interest rates between 30-60% plus fees, late charges, and insurance. Installment loans are one of the fastest-growing credit products in Canada and make up most online high-cost loans.

The growth in demand for quick cash and fast installment loans brought more players into the industry. Major competitors today include Cash Money, Money Mart, Easyfinancial, and Fairstone, as well as online-only lenders Mogo, LendDirect, Borrowell, Loan Away, and many more.

These trends indicate a transforming landscape for payday lending in Canada, with potential implications for lenders and borrowers.

Who Uses Payday Loans and Why?

Many Canadians use payday loans, but certain demographic patterns emerge when examining the typical borrower profile. Understanding who uses these loans and their reasons is crucial for assessing the industry’s impact and formulating effective policies.

Demographic Profile of Typical Payday Loan Borrowers

Contrary to common perception, payday loan use is not restricted to low-income individuals or younger borrowers.

48% of payday loan borrowers are between the ages of 35-54
6% of payday loan users are seniors (aged 65+), and evidence shows use among this age group is growing rapidly
47% have a moderate or higher income, with 20% earning above the Canadian median household income
41% of payday loan users are homeowners, although renters still make up the majority at 55%.

Common Reasons for Seeking Payday Loans

A 2023 Statistics Canada study found that one in four Canadians were unable to cover an unexpected expense of $500.

Borrowers turn to payday loans as a last resort when they face financial emergencies or struggle to make ends meet between paycheque.

45% use a payday loan to pay for an unexpected but necessary expenses such as a car repair
41% use a payday loan to pay for an expected, necessary living cost, including a utility bill or rent
17% turn to payday loans to avoid a late charge on upcoming bill payments.

Many face the dilemma of missing an important payment versus taking out an expensive payday loan.

The Cycle of Debt and Repeat Borrowing

One of the most concerning aspects of payday lending is the high rate of repeat borrowing, which can lead to a cycle of debt. In a traditional payday loan, the borrower must repay the loan with interest on their next payday. When funds are automatically withdrawn from their account, they are likely left with no funds to survive, so they require another short-term loan.

Approximately 45% of payday loan borrowers take out multiple loans in a year.
The average payday loan user takes out 2-3 loans annually.
More alarmingly, 15% of payday borrowers have taken out more than 10 loans in the past three years.

This pattern of repeat borrowing suggests that payday loans are not a one-time solution to temporary financial difficulties for many users but rather a recurring coping mechanism for ongoing financial instability.

The high cost of these loans exacerbates the problem. Borrowers often find themselves taking out new loans to repay previous ones, creating a difficult-to-break cycle. This is particularly challenging for the 80% of repeat borrowers who report taking out loans to cover recurring expenses, indicating a fundamental mismatch between their income and necessary expenditures.

We also see a trend towards payday loan borrowers climbing the high-cost debt ladder. Many start with a small, single payday loan. Unable to repay that loan, they borrow from a second payday lender. Now owing twice their pay, they turn to a larger installment loan with a longer payback period. The problem is, with interest rates as high as 60% plus fees, debtors are still burdened by this high-cost debt, starting the cycle all over again.

The Connection Between Payday Loans and Financial Distress

There is a strong correlation between payday loan use and various indicators of financial difficulty, including bankruptcy and insolvency.

Default Rate

The default rate for payday loans is notably high. A report from the Financial Consumer Agency of Canada (FCAC) found that about 20% of payday loan users fail to repay their loans on time, leading to further financial distress through additional fees and interest.

Payday loan borrowers are largely unable to repay their loans, with or without filing insolvency:

28% of payday loan borrowers use additional debt to repay their payday loans:
7% took out a new payday loan to pay off an existing one,
7% borrowed from friends or family,
while the remainder used their bank overdraft or borrowed through a cash advance, bank, credit union or pawnbroker.
4% reported they did not repay their loan.

Payday Loans and Insolvency

The relationship between the payday loan industry and bankruptcy has become increasingly pronounced in recent years, highlighting the financial implications of high-cost borrowing. Our research reveals a rising prevalence of payday loans, which contribute to overwhelming debt and insolvency. The multiple payday loan trap leads to increasing debt loads and impossible repayment.

From our 2023 research:

40% of all consumer insolvencies involved payday loans, a stark increase from just 12% in 2011. Roughly half (49%) had a payday and/or high-cost installment loan.
Among insolvent borrowers, 73% had two or more payday loans simultaneously. Even more concerning, 9% owed money to at least ten different payday lenders.
The average insolvent payday loan borrower owed $8,157 in payday loans. If you include instant-cash installment loans, high-interest debt increased to $12,352, representing 28% of their total unsecured debt.
Insolvent borrowers owed more than 2.5 times their take-home pay in payday loans. When you add subprime credit installment loans, this debt increases to almost four times their income.

More than ever, we see clients using larger and longer-term loans from payday and online lenders. Most clients tell us they know payday loans are expensive; however, they turn to payday loan companies to keep all their other debt payments current for as long as possible. The problem is that high-cost, longer-term loans do not help. They make an already bad financial situation worse.

Vulnerable Demographics and Payday Loans

While payday loans affect a broad spectrum of Canadians, our experience shows that certain demographic groups are particularly vulnerable to the potential negative impacts of these high-cost credit products.

Seniors and Payday Loans

Payday loan companies specifically advertise that they will lend against CPP, ODSP, retirement benefits, and pension income.

The use of payday loans among seniors, while lower in overall percentage, is a growing concern:

According to the Financial Consumer Agency of Canada, 6% of payday loan users are seniors aged 65 and older.
In 2023, 28% of insolvent debtors aged 60 and older had outstanding loans to a payday lender, with an average debt of $9,606.

These statistics are particularly alarming, given that many seniors live on fixed incomes.

Young Adults, Millennials and Payday Loans

Young adults are struggling to make ends meet. Over one-third (35%) of those aged 35-44 reported that they could not cover an unexpected expense of $500.

Young Canadians are significantly more likely to access the rising online market. Millennials represent a significant portion of payday loan users:

More than half of payday loan users (51%) are between the ages of 25 and 44.
Our insolvency study found that 43% of insolvent millennial debtors carried payday loan debt, surpassed only by post-millennials, with 45% carrying payday loans.

In addition to covering living costs, younger debtors are turning to payday loans to manage existing debt. A 2016 Harris Poll conducted on behalf of our firm found that 39% of millennial payday loan users (aged 18-34 at the time) said they sought a payday loan because of the amount of debt they carried.

Single Parents and Payday Loans

Another demographic targeted by payday loan companies is single parents, with advertising mentioning ‘child tax payday loan’ and ‘single parent benefits in the form of payday loans’.

Single parents are less likely to be able to save for unexpected expenses or emergencies compared to households overall. The result is a higher propensity to use payday loans. Single-parent families are likelier to use payday loans (8%) than couples with children (4%).

Our insolvency study also highlights this divide. Half (50%) of single-parent debtors filing insolvency had a payday loan, compared to 41% for two-parent households.

Renters vs. Homeowners and Payday Loans

It may surprise some that homeowners are not immune to the lure of payday loans.

While 55% of payday loan users are renters, 41% are homeowners.
Renters who use payday loans are more likely to be repeat borrowers, with 25% taking out 6 or more loans in a year compared to 18% of homeowners.
Homeowners who use payday loans often have higher loan amounts, with an average of $1,830 compared to $1,379 for renters.

These statistics suggest that while renters are more likely to use payday loans, potentially due to lower overall financial stability, homeowners who turn to these loans may do so for larger financial emergencies.

Again, our insolvency study confirms this finding:

29% of insolvent homeowners carried at least one payday loan, compared to 40% for non-homeowners
Insolvent homeowners owned an average of $12,424 to payday lenders, compared to $8,024 for renters

Student Loans and Payday Loan Use

Although students rely heavily on government and private student loans to cover tuition fees, housing costs, and rising living costs, many seek alternative credit options, including payday loans and high-interest lines of credit.

There isn’t a single definitive number available on how many Canadian students use payday loans specifically. However, we know that 6% of payday loan users are between the ages of 18 and 24, which rises to 24% for those aged 25 through 34. During this second window, young graduates must begin to repay their student loans. It is not unreasonable to think that a significant number of those payday loan borrowers also carry student debt.

What we do know from our insolvency study is that:

44% of insolvent debtors with student loan debt carried payday loan debt
54% carried either a payday loan or high-cost installment loan from a secondary lender

Payday loans are easy to qualify for, often with no credit check. However, for an already indebted student loan borrower, payday loans and other rapid loans may not be a temporary solution but permanent debt.

Recommendations For Fixing the Payday Loan Industry Properly

Yet despite all the warnings and changes, payday loan use among our clients is on the rise. FCAC has worked to improve financial literacy around the true cost of payday loans. Governments have lowered the cost of borrowing, increased disclosure, banned rollovers and created waiting periods. Why aren’t these efforts working?

The real issue is that there is a need. People have payday loans because they think they have exhausted all other options. What is concerning is not the occasional use of a very expensive borrowing option but rather the sustained repeat borrowing that leads to multiple loans and financial distress.

Lenders will adapt to most regulatory changes. Many have already moved beyond traditional payday loans to offer installment loans and lines of credit.

So, how do we solve the overuse of payday loans or expensive installment loans?

Even better interest rate disclosure. Payday loans should no longer be advertised as $x per $100. In Ontario, payday lenders must disclose the true APR (391.07%). Still, this advertising disclosure is generally in a much smaller font and overpowered by repeated, much larger text highlighting the cost per dollar borrowed. If faced with a 391% interest rate rather than the more attractive $14 or $15 per $100 borrowed, some potential borrowers may be encouraged to look for other options before falling into the payday loan trap.
Improve cost disclosure early in the buying process. Most lenders promote easy approval and no credit check. Full costs and conditions are not seen until the end of the sales process. Customers must create an account for online installment loans before beginning the application process. By then, they are likely committed to the process and have provided personal information, including their email, allowing for more marketing even if they abandon the loan application process.
Urgent, high-cost installment loans are the new payday loans. For these types of online loans, the interest rate is generally not disclosed before purchase. Payday lenders and low-credit installment lenders should be required to disclose in all advertisements the range of rates that may be charged on quick cash loans of up to $15,000.
Limit additional fees. Optional charges, including insurance and application fees, can increase the costs of these loans by as much as 50%. By default, all additional offerings should require an extra opt-in with clear cost disclosure up front. There should also be limits on the additional fees that can be charged.
Credit reporting. Payday lenders should be required to report all loans to the credit reporting agencies, just as banks do with loans and credit cards. This may make it more obvious that a borrower is getting multiple loans. Additionally, reporting payments to the credit bureau could help those with limited borrowing options improve their credit score.
Limit loans. We could even limit the number of payday loans a person can borrow each year.

The Borrower’s Responsibility

Although opening up a discussion about ways to regulate the payday loan and quick cash installment loan industries is a step in the right direction, the solution for curbing this kind of crippling debt is to be informed about the money that your are borrowing. Crunch the numbers and know how much the total loan will cost you. Before you use any financial product, know there are alternatives to payday loans to avoid high-cost lenders and overwhelming debt.

If you’re already struggling to deal with high-interest loan debt, there are options to get out of payday loan debt. Contact a Licensed Insolvency Trustee today to talk about how a consumer proposal or bankruptcy can help you get off the payday loan cycle.

Payday loans are not going away. If we try to eliminate them, potentially worse alternatives will appear. That’s why we believe the true solution is to find a way to reduce reliance and use rather than legislate payday lenders out of business.

Source Material:

https://www.hoyes.com/press/joe-debtor/

https://www.canada.ca/en/financial-consumer-agency/programs/research/payday-loans-market-trends.html

https://www.cardus.ca/research/work-economics/reports/the-changing-face-of-payday-lending-in-canada/

https://www.canada.ca/en/financial-consumer-agency/programs/research/financial-well-being-mortgages.html

https://ised-isde.canada.ca/site/search-research-database/en/node/15081

https://www150.statcan.gc.ca/n1/pub/75-006-x/2019001/article/00010-eng.pdf

http://cfcanada.fticonsulting.com/cashstorefinancial/docs/Factum%20of%20the%20Applicants.pdf

https://www150.statcan.gc.ca/n1/daily-quotidien/230213/dq230213b-eng.htm

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