The government of Ontario, and many other jurisdictions, are looking for ways to better regulate and control payday loans. Even Google has weighed into the fray by banning ads from payday lenders. Yet, most critics focus on the high costs associated with these loans and the short term nature of repayment. The payday loan industry claims they serve a need; providing access to cash in the form of short term credit, where traditional credit sources are not available.
UPDATE: On August 29, 2016 Frank Denton, the Assistant Deputy Minister of the Ministry of Government and Consumer Services, issued a letter stating that after “carefully considering all the comments we received”, the government will lower the maximum fee a payday lender can charge from the current $21 per $100 borrowed to $18 per $100 in 2017, and $15 per $100 in 2018 and thereafter. Our position is that while this is a start, it is not a sufficient solution to the payday loan problem in Ontario. Our original study, below, explains why.
At Hoyes, Michalos & Associates we see another, much more concerning side to this issue. Contrary to popular belief, it is our contention that a significant portion of payday loan users come from medium to high income households, who are using payday loans as a way of servicing their other existing debts.
While the cost of borrowing is certainly an issue, we believe that payday borrowing is a symptom of a much deeper financial problem – too many Canadians are carrying too much debt. Our own Joe Debtor study seemed to support this:
- Based on a study of our clients from 2013-2014, almost one in five (18%) insolvent debtors listed a payday loan as an unsecured debt. On average they had 3.5 payday loans, totaling $2,749 in payday loan debt, on top of an average of $35,799 in other unsecured debt.
- While the majority (63%) had an after-tax monthly income between $1,000 and $3,000, almost one-third (27%) had an income in excess of $3,000 per month.
Payday Loan User Study
To see if this was a systemic problem for payday loan users in general, we commissioned Harris Poll to conduct a survey to determine to what extent payday loan borrowers in Ontario carried existing debt when taking out a payday loan and any changes to debt loads through the use of payday loans.
This study confirmed our suspicions that payday loans are being used by individuals who are already in debt from other, more traditional, sources and that payday loans are making their financial problems worse.
The key findings from the Hoyes Michalos / Harris Poll study are outlined below (more of which you can find in our infographic at the end of this article):
The majority (83%) of payday loan users in Ontario carried other debt at the time they took out a payday loan. In fact, 83% of payday loan users had outstanding loans at the time of their last payday loan. On average they owed $13,207 in unsecured debt and frequent users (four or more payday loans used in the past 12 months) are more likely to have accumulated more debt overall ($17,501) than medium (two to three payday loans used in the past 12 months) or occasional users (one payday loan in the past 12 months).
Almost half (48%) of payday loan users agree that they sought a short term or payday loan due to the amount of other debt they carry. In addition, 46% of those who used a payday loan in the past 12 months agree they did so because it made it easier to keep up with their debt repayments.
Payday loan users are turning to payday loans because they are already tapped out on other debt sources. The Hoyes Michalos / Harris Poll study shows that almost three in four (72%) payday loan users explored other lending sources at the time they took out their last payday/short term loan. More specifically, among payday loan users: 39% considered using their credit card; 32% explored a line of credit; 20% considered a bank overdraft. It is likely that, having fully exhausted these options, they turned instead to payday loans despite the high interest costs. In fact, 60% of payday loan users agree that payday or short term loans are a last resort after they have exhausted all other options and almost one in four (23%) said they had maxed out their credit cards as a reason for turning to a payday loan.
Medium and frequent payday loan users are significantly more likely to say that their debt has increased since their last payday/short term loan. More than half (55%) of payday loan users take out more than one loan in a 12-month period. Of those, 45% say their overall debt load increased post payday loan while only 14% reported their debt decreased.
A Not So Simple Solution to a Complicated Problem
We do not believe, based on these study results and our experience, that the cost of borrowing has an impact on the decision of most payday loan users. When existing debt consumes enough of one’s pay so that keeping up with their debt obligations becomes difficult, payday loans become a viable option despite the cost. It is for this reason that we do not believe focusing solely on the cost of borrowing is sufficient nor will it be sufficiently effective.
While consumers need further protection when it comes to payday loan practices, we believe the solutions should provide individuals with the tools to make better borrowing choices. Our recommendations, submitted in a letter to the Ministry of Government and Consumer Services, include:
- A requirement that payday loan lenders advertise the annual cost of borrowing in terms of APR rather than the current practice of expressing the cost of borrowing as, for example, $21 per $100. A borrower will be able to compare lending options more accurately, and understand that borrowing even from a high interest credit card at 29% is a better choice than taking out a payday loan at 546%.
- A requirement to report all short term loans to the credit reporting agencies. Doing so can help the debtor in two ways: those who do not have the credit capacity to continue borrowing may be turned down for a loan and encouraged to seek alternative debt relief solutions to their debt problems sooner rather than later. For other borrowers, having any positive payment history reported on their credit report should have a positive impact on their credit rating, ensuring that they can qualify for lower cost borrowing options from more traditional sources over time.
- A prohibition against introductory rates. In the Hoyes Michalos / Harris Poll study, three in four (75%) of those who had taken out a payday/short term loan in the past 12 months agreed they would definitely or likely take out a payday loan in the next 12 months. Introductory rates are a way of capturing repeat borrowers. As such, prohibiting introductory rates will help reduce the number of people who become trapped into the payday loan debt cycle.