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We have a crisis and it’s called payday loans. At Hoyes Michalos we believe payday loans are a real problem because all too often they create a vicious cycle of debt. We also don’t believe that recent efforts by the Ontario Government have been enough to deal with the hidden truth behind payday loans: already indebted Ontarians are borrowing multiple payday loans, from multiple payday lenders at the same time, and this is contributing to a record rate of payday loan induced insolvencies.
How we know this is because every two years we analyze data from actual insolvencies to find out why someone files insolvency. We call this our Joe Debtor study. Part of our study includes a detailed dig into payday loan use by Joe Debtor so that we can isolate the behaviour and profile of the average insolvent payday loan user.
Our data points to four startling findings:
- 1 in 4 insolvent debtors had at least one payday loan at the time they filed a bankruptcy or consumer proposal.
- The average insolvent payday loan borrower has 3.4 payday loans with total outstanding balances of $2,997.
- Payday loans make up 9% of borrower’s total unsecured debt of $34,255
- An insolvent debtor with payday loans owes 121% of their MONTHLY take home pay in payday loans.
When we’re pushing out statistics like that, not getting a payday loan seems like a no brainer. The fact is that people turn to payday loans because it’s the last type of debt they can get. They already carry a high amount of credit card debt, bank loans, and other unsecured debt and they need to keep up with the minimum monthly payments on this debt. At some point they can no longer pay for the groceries on their credit card because it’s maxed out. They may have a car payment coming due, rent, or need to buy groceries. So they turn to payday loans.
People have payday loans because they have exhausted all other options.
Here’s the problem. Once this cycle begins, they run out next pay. So they visit two payday loans stores and so on. Eventually the average insolvent payday loan borrower owes almost $3,000 in payday loans. While $3,000 doesn’t sound like a lot, it does when you are talking payday loan rates. At $18 per $100 on $3,000 which they are consistently rolling over every pay, Ted explains the real cost:
Over the course of the year that’s $14,000 in interest on $3,000 worth of debt.
The Ontario government is once again visiting how to manage and control the payday loan industry. We tried to get into the room at Queen’s Park to talk about the proposed changes to Bill 59 Putting Consumers First Act, but we weren’t awarded that opportunity. So instead of lobbying at the legislative level, we wrote the government, first in May 2016 and then again in February 2017. We also pushed a press release about our findings through traditional and online media. We’ve sparked a lot of discussions online, and now we’re here to let you know our recommendations in case you’ve missed the online chatter.
We recommended that to help break the cycle of debt, and to shed more transparency on the payday loan industry, the government should:
- Require payday loan lenders to advertise loan costs in terms of the effective annual interest rate, which currently amounts to 468%. Understanding the true cost of payday loans may discourage heavily indebted consumers from taking on multiple higher cost payday loans.
- Require payday loan lenders to report payday loans to the major credit reporting agencies. This will reduce the likelihood that heavily indebted Ontarians will be able to take out multiple payday loans simultaneously from more than one lender. Current legislation to limit repeat borrowing or set a time limit between loans only affects a single payday loan store. It doesn’t deal with the fact that people can walk up the street, or go online for another loan the same day.
- Prohibit low introductory rates to reduce the temptation for first time borrowers to increase their debt burden with the use of a high cost payday loan they cannot afford to repay.
Today’s show provides insight into our study findings and takes a look at what other provinces have already done to reduce payday loan pain for consumers. We also talk about the actual math behind a payday loan, which highlights why you shouldn’t start down this path in the first place.
Finally we give practical tips on alternatives to payday loans. If you are already dealing with debt, a payday loan isn’t going to solve the problem. We suggest talking with a Licensed Insolvency Trustee instead so you can start earlier on building a plan to become debt-free so you have money left at the end of your pay period without having to rely on payday loans.
Resources mentioned in today’s show:
- Show #53 Clamping Down on Payday Loans & Regulating Alternative Lenders
- Show #83 Creating a Better Payday Loan Industry
- Show #85 Bill 156 – Is This The Payday Loan Regulation We Need?
- Show #92 Payday Loans Not The Real Problem: Consumer Debt Is
- Show #99 How to Fix the Payday Loan Industry
- Government of Ontario Payday Loans Act, 2008
- Bill 156 Alternative Financial Services Statute Law Amendment Act, 2016
- Our recommendations to the Standing Committee on Social Policy
FULL TRANSCRIPT show #130 with Ted Michalos
Doug Hoyes: Well, this show should get us into lots of trouble because once again we’re going to talk about what the government is doing, or not doing, about the crisis in payday loans. I’m joined by a guy who hates payday loans, my Hoyes Michalos co-founder and partner, Ted Michalos, you ready to go?
Ted Michalos: Sure, I hate payday loans.
Doug Hoyes: I know. So, well before we get started some trivia for our listeners: The first ever edition of Debt Free in 30 was titled “Ted Michalos Rants About Payday Loans”. That was episode number one back in September of 2014 and here we are obviously in 2017. This is episode number 130.
So, 130 episodes later and we’re still talking about payday loans. Out of our 129 previous episodes, that episode, episode number one where you ranted about payday loans is our third most downloaded podcast of all time. And the only two podcasts that had more downloads was a podcast on the smart ways to pay off debt, which of course is kind of the whole theme of this show. And the most downloaded podcast is the one I did with Gail Vax-Oxlade where we talked about whether or not reality TV is real. So, that tells me that payday loans are a big and important topic, or people just like hearing Ted rant, one or the other. So, you’re going to get both on today’s show.
Ted Michalos: Congratulations.
Doug Hoyes: So, let’s start with some of the background. In 2008 the government of Ontario introduced the payday loans act to regulate payday loan lenders. Before that the only real regulation was the Criminal Code of Canada, which of course was federal legislation.
In 2016 the Ontario government introduced Bill 156, the alternative financial services statute law amendment act because they like simple titles, where they proposed various changes to the payday loans act, including limits on how many payday loans you could get in a certain period of time, obviously to prevent multiple repeat payday loans. The bill made it second reading but then it died because parliament ended and they started a new one.
So, in August of 2016 the Ontario government announced that they were amending the regulations to the payday loans act, which of course doesn’t require any new legislation, to reduce the maximum total cost of borrowing a payday loan. So, Ted walk us through what the rules were and what they are now.
Ted Michalos: So, the rules used to be that it was $21 on 100 and the rules now are $18 on 100. So, that’s a positive thing that makes sense, it reduced it. But what people fail to understand is they confuse that $18 on 100 with 18% interest and that’s just not the case. It’s 18% interest every two weeks.
Doug Hoyes: Yeah and we’re going to do some more detailed math as we get into it. And so, $18 on 100 is the rule now. And then starting next year January 1st, 2018 it goes down to $15 on 100. So, on November 3rd, 2016 the Government of Ontario introduced a new thing, the Bill 59, The Putting Consumers First Act. This is a catch all bill that proposes changes to a diverse bunch of legislation including acts that deal with home inspections and financial services and consumer protection.
The Bill 59 contained some of the provisions that were not enacted in the old Bill 156, so they kind of copied from the old one to put it into the new one. So, for example under the new act, which is not yet law, a payday loan lender can’t operate at an office location if a municipality passes a bylaw prohibiting it.
Ted Michalos: Right. So, if the town or city you live in says no, we can’t have a payday loan lender in that location, they have to move to someplace else.
Doug Hoyes: Which, I don’t know if you need a provincial law for that. because if the municipal law says you can’t do it then I don’t know why you need a law. But okay, fine whatever, got to have laws I guess. The bigger one is that a payday lender cannot give a new payday loan unless at least seven days has passed since the borrower paid the full outstanding balance on their last loan.
Ted Michalos: Now that doesn’t mean you can’t go to a second lender, right?
Doug Hoyes: And that’s the problem with the law. So, it’s great you can’t kite from one to another but you go to another one. So, you know, whether these new laws are going to mean anything or not who knows. So, Bill 59 was carried on second reading of November 30th and then it was referred to the standing committee on social policy for further review. And that committee has hearings scheduled on February 21st, well that’s already happened, 27th and 28th, 2017. Now Ted and I asked to appear before the committee.
Ted Michalos: Very politely.
Doug Hoyes: Very politely. We sent a really nice letter. But they said yeah, no sorry, we don’t want to hear from you guys. So, why did we want to go before the committee and what would we have said? Well, let’s find out. So, Ted let’s start with the very, very basics here. Payday loans, what exactly is the biggest problem with them?
Ted Michalos: The biggest problem is the cost. So, I mentioned the interest rates earlier, let’s do a specific example. From our study of what our clients have borrowed from payday loans, the average person has about $3,000 worth of payday debt when they have to come and file either a bankruptcy or consumer proposal. Now $3,000 may not sound like a lot of money relative to all the other debt that they owe, but remember this is debt that you’ve got to pay the fees on every two weeks. So, that $3,000 two weeks later you’re paying $540 in interest expenses. That’s $18 on 100 and you’ve got 30 hundreds. Two weeks after this you pay another $540. Over the course of the year that’s $14,000 in interest in $3,000 worth of debt.
Doug Hoyes: This is a big problem and that’s why obviously we’re not big fans of payday loans. So, we didn’t get called as witnesses at Queen’s Park but if we did get called those are the kind of things that we would have said. We would have said, you know, despite all of our warnings about the high cost of payday loans, heavily indebted consumers are still using payday loans and in fact they’re using them more than ever before.
So, how do we know this? Well, Ted already alluded to it. Every two years we release what’s called our Joe Debtor Study. We take all of the data from all of our clients and we analyze it and we come up with the profile of what someone who goes bankrupt or files a consumer proposal looks like. Now we’re going to releasing the full study at the beginning of April. We’re releasing all the number crunching on it. But today because of these hearings that are going on at Queen’s Park, we’re going to give all of our listeners a sneak peak of the data from that study. And I’ll even give you a web link here you can see it all, it’s joedebtor.ca/paydayloans.
So, here it goes. We had four key findings that we’re going to be mentioning and obviously releasing in the full study. So, finding number one, 1 in 4, so 25% of our clients, insolvent people, had a payday loan, which was up from 18% in 2015. Let me give you two more and then I’m going to bring Ted in to comment on this. Of our clients that have payday loans, Joe Debtor, as we call our average client, has on average 3.4 payday loans with total balances outstanding of $2,997. That’s about the three grand that Ted was just talking about. That’s up 9% from the $2,749 it was when we did the study two years ago and released it in 2015.
Number three key finding payday loans make up 9% of payday loan borrower’s total unsecured debt of $34,255. So, okay that’s a whole bunch of numbers let’s not be confusing everybody here, let’s get to the gist of it. So, Ted, $3,000 in payday loans doesn’t sound like that much, particularly when as a percentage my total debt’s $34,000 so okay $3,000 is less than 10% of my total debt. What’s the problem? Is it as simple as what you just said that the interest is massively high?
Ted Michalos: Well, one of the problems with averages is they hide some of the underlying facts. So, one of the things our study found was that the youngest decile of people, 18 to 29 year olds have the most payday loans. The total amount that they borrowed is lower but it’s more than 10% of their debt. The every age bracket, the percentage of the payday loans compared to their debt is lower but the total amount that they borrowed is higher. The highest borrowers are the seniors. Again, the part of this that is most disturbing is the trend. So, two years ago it was less than one in five of our clients had payday loans, now it’s one in four. That’s a 38% increase, that’s absolutely astounding.
Doug Hoyes: Yeah and I think it really debunks the myth. because when you talk to people on the street they go, oh yeah payday loans, those are people who don’t have jobs, they can’t get any credit, that’s why they get payday loans.
Ted Michalos: None of that’s true.
Doug Hoyes: No, it’s just not the case. I mean people have payday loans because they have exhausted all other options.
Ted Michalos: Right.
Doug Hoyes: It’s the last type of debt they can get. And we know that to be a fact because they’ve got $34,000 in unsecured debt. They’ve already got credit cards, bank loans, other forms of debt. And I have no other options. And we’re going to talk about what some of the other options are. That’s why they’re turning to payday loans.
Ted Michalos: Yeah, the fourth of our key findings is probably the one that’s most illuminating of this problem. So, Joe Debtor, our average client owes 121% of their take home pay in payday loans. So, that means for every dollar of take home pay that they have, they owe $1.21 in payday debt.
Doug Hoyes: Yeah, they owe more in payday loans than they make in a month.
Ted Michalos: How’s that possible? How can you ever repay it?
Doug Hoyes: It’s a massive problem and you’re right, how can you ever repay it? Well, we got a few other supplemental findings that I want to get your thoughts on. So, 68% of payday loan borrowers have income over $2,000 and those earning over $4,000 had the most loans, 3.8 on average. So, that’s what you’re saying, with each age group we go up it gets worse and worse.
Ted Michalos: Right and the more money you make the more you’re able to borrow on payday loans and so consequently the more you do borrow. Once you get on to this treadmill there’s no getting off.
Doug Hoyes: Middle and upper income earners are more likely to use payday loans to access. They can borrow more so they do.
Ted Michalos: Right, paycheque is higher so they’ll let you take out more money.
Doug Hoyes: They’ll let you borrow more. Now you hit on the age groups, 38% of debtors, age 18 to 29. So, I guess we’re talking like millennials. They use payday loans and on average they owe $2,292, so just under $2,300.
Ted Michalos: That’s more than one in three.
Doug Hoyes: That’s a huge number, 11% of seniors. So, we define seniors as anybody 60 years and older.
Ted Michalos: Thank you I’m not there, I’m close but I’m not there.
Doug Hoyes: Just so we’ve got a clean cut off. 11% of people 60 years of age and older have payday loans and on average if you’re a senior and have a payday loan, you owe $3,593.
Ted Michalos: Folks, these are people getting payday loans based on their pensions. I mean there’s no chance of them going out and getting some overtime or an extra shift, their income is fixed, $3,600 a month.
Doug Hoyes: Yeah and we’ve talked about this in the past. Why is a senior getting a payday loan? Well, number one because they can but number, you hit the nail on the head, two they have a fixed income.
Ted Michalos: Well and the psychology here is astounding. The seniors are the ones that feel the most guilty about not making their other debt payments. So, they’re going to go find a money wherever they can to make sure they keep their payments up to date because that credit ratings really important and I’ve got a debt, I’ve got to pay it. And so they incur these payday loans, which are absolutely insane.
Doug Hoyes: Well, and maybe it’s a stereotype but seniors in general are good people. I mean they’ve been reliable their whole lives, like you say they pay their debts. In a lot of cases they are parents, they have adult children now. I mean if you’re 60 years old your kids are probably grown or close to it and you’ve always helped them out, you want to keep helping them out, particularly in this economy, jobs are tough, people are getting separated and divorced, you want to help them out.
Ted Michalos: And now you’re helping your parents too.
Doug Hoyes: And your older parents, that’s even possible too because if you’re 60 years old you could still have an 85 year old parent still alive. How do you help everyone if you don’t have the money? Well, you go out and borrow.
Ted Michalos: And how can anybody think that having $3,600 in payday loans is going to solve your problems? I mean it just makes it so much worse.
Doug Hoyes: Yeah and it just can’t is unfortunately the problem. So, when we did our Harris poll back in 2016 we discovered that 60% of Ontarians, aged 18 to 34, so again we’re talking kind of in that millennial age group, reported that they would definitely or probably recommend payday loans to family, friends and coworkers. I mean that again is just absolutely astounding. So, Ted do you have any theories on why the average payday loan size is increasing?
Ted Michalos: Well, primarily it’s because the need has increased. So, the payday loan fellows will extend to you as much credit as they think you can repay. And they don’t take into account your other debts, or your other obligations. It’s if your pay is high enough they’ll give you enough money. And people unfortunately need to borrow more now because total debt loads are increasing.
Doug Hoyes: Well and what’s becoming insidious as well is that the payday loan companies are offering different products.
Ted Michalos: Yes, that’s true.
Doug Hoyes: So it’s not just okay we have a payday loan, the maximum is $500, that’s all you can get. No, no now we’ve got short-term loans and –
Ted Michalos: So this is great so I’ve sold you the payday loans but to help, at 460% interest, but to help you out I’m going to put you into a longer term installment loan. That’s only at 60% interest. I’m such a nice guy.
Doug Hoyes: Well and that kind of leads into our next topic, which is our recommendations. So, we’ve obviously studied this a great deal and what I’m going to do is put in the show notes, a list of all of the podcasts that we have done on this topic. Obviously we started with number one but we’ve been, we’ve done a number of them. I’ve had a number of guests on. I mean you can look for show number one, 53, 83, 85, 92, 99, those are all payday loan themed shows.
So, we’ve done a lot of research on it and we’ve looked at all the different possibilities for how to fix this problem. We looked at three different recommendations that we eventually decided, yeah, you know what they’re good ideas but not good enough that we can recommend them. So, I want to throw out what we didn’t recommend before we talk about what we did.
So, three changes that we thought of and have been recommended by others, number one limiting loan sizes based on income. So, loans could be limited to a fixed percentage of the next paycheque. So, for example if my next paycheque’s going to be $1,000 you could say hey, the maximum you could lend is half of that, $500. And in fact in Saskatchewan, the limit is 50% of the next paycheque. So, is that a good idea? Well, obviously we didn’t think it was a good idea, what’s the downside?
Ted Michalos: So, intuitively you think that makes sense. If you limit it to how much of their payday they’ve got coming, then how much trouble can they get into? But unless you also limit the number of outlets they can go to, it doesn’t make any difference. If I can only borrow $300 from the cash store that’s on the corner, then I’m going to go to the Money Mart that’s two blocks down and borrow 300 more if I needed 600 in the first place. So, it gives the appearance of solving the problem but it doesn’t really unless you also restrict the number of locations and loans that they can take out at one time.
Doug Hoyes: Well and you’re not giving a theoretical argument.
Ted Michalos: No, that’s the reality.
Doug Hoyes: That’s the reality. Our study shows that the average person who has a payday loan has –
Ted Michalos: 3.4 of them.
Doug Hoyes: 3.4 of them. So, if you have one, you’re likely going to have three. And again, as you said earlier those are averages. We’ve had clients who’ve had a lot more than three.
Ted Michalos: So, 10 years ago we wouldn’t have seen this. We saw a payday loan once maybe every 100 clients. Now we actually see folks who come and see us and file a bankruptcy or proposal because of their payday loan debt. So, they could have 12, 13, 14, 15 of these things. The total might be 12 to $15,000 but I mean it’s impossible. They’re making $2,000 a month, they owe $15,000 in payday loans, they can’t even make the $18 interest payments every two weeks.
Doug Hoyes: And the reason they have so many is there are so many of these outlets now. It’s not just the store on the corner of the street, there’s now tons of online lenders.
Ted Michalos: Yeah, the online stuff just drives us crazy.
Doug Hoyes: And so you can – literally there are 15 or 20 different people you can borrow from and that’s what people are doing. So, okay our first recommendation we decided not to recommend was limiting loan sizes just because all that does is induce you to go to different lenders.
The second thing we looked at but decided against was a limit on the number of short term loans a borrower can obtain in a fixed period of time. So, as I said at the outset Bill 59 sort of has this in it in that you can’t get a new loan until seven days after you’ve paid off the last one. Again, sounds good in theory, what do you see as the practical problem with that?
Ted Michalos: Well, then you have the same issue we had with the first recommendation in that you’ll just find someone else or worse you’ll got to a non-regulated borrower. And so that’s code for the guy on the shop floor who’s going to lend you money.
Doug Hoyes: Or the guy on the internet who’s in a different country and isn’t subject to any kind of rules. So, again, you know, not a totally bad idea, it just wasn’t something that we were prepared to recommend. The third thing that we thought about and I think you eluded to this one earlier as well is why not have an extension of the time permitted for repayment. So, your typical payday loan you’ve got to pay it off your next payday, which means I’m in a big crunch in a week’s time, why not have payday loans that can run for a month, three months, six months, what’s the problem with that?
Ted Michalos: And effectively the companies have done this themselves as a way to recover even more money. All it does is stretch out the pain. Once you get two, three, four thousand dollars worth of debt from a payday loan, even if you switch it to that installment loan, repay it off over six months, they’re going to do that at 60% interest, which is what I was talking about earlier. So, it still isn’t a deal. Really if you get into that kind of trouble you need to find some traditional sources of money, a bank loan, a line of credit, something that well, 12%, a credit card at 18% is better than 60% on one of their loans or the 468% you’re paying on the first one.
Doug Hoyes: Yeah and we’re going to talk about some positive things that people can do. But you’re absolutely right, if I’m paying a massive interest rate, paying for longer isn’t going to solve my problems. So, we did recommend three things though that we think are again based on our specific knowledge our specific review of the data, our clients that we would recommend to enhance consumer protection in Ontario.
So, I’ll rhyme off the three and then we can talk about them, number one a requirement to advertise the annual percentage rate, number two a requirement to report all short-term loans to the credit reporting agencies and number three a prohibition against introductory rates for payday lenders. So, let’s start with number three first.
Ted Michalos: Yeah, let’s do that.
Doug Hoyes: because you’re a big fan of this one, teaser rates. So, a teaser rate, well explain it to us, what is a teaser rate and what’s the issue there?
Ted Michalos: So the most common example of a teaser rate is that, you know, we’ll only charge you the admin fee for your first payday loan. So, you don’t have to pay that $18 on the 100 for the first two weeks, it’s a $20 fee. Well, that’s great, you’ve got your $300, you’re able to pay your bill. Two weeks later roll around, you pay it off on the payday and now you’re short again.
Well, I got that first loan that worked out really great, I’ll get a new one just to replace it. Well, the new ones at 18 bucks on 100. And so, you’re on the treadmill now and there’s no way to get off. So, what the teaser rate does is it makes it artificially less painful to get started down this horrible path that you’re about to follow.
Doug Hoyes: Now I know why drug dealers will give you a free sample.
Ted Michalos: Yeah, in the last show I used that as an example and some people told me it was somewhat offensive. But that’s the truth, it’s like giving someone a first free bag of crack and say here, have this. Sorry, I’m going to get calls again.
Doug Hoyes: Yeah but we’re not going to edit it out. I told you we were going to get into trouble with this show. So, I’ll have the government mad at us and I guess we’ll have everyone else. As I said earlier the, you know, Ontario payday loan users are borrowing from payday loan lenders, it’s not because they can’t access any other credit but because they have exhausted all other options. So, whether there’s a teaser rate or not, they’re still borrowing you’re not helping things. We decided against that as a – so, we are opposed to teaser rates. It’s as simple as that.
Now I think there’s a much bigger issue and this I think would be my number one one and that is the disclosure of the cost of borrowing. So, our objection is that $18 on 100 sounds like a great deal, it isn’t. So, let’s talk in terms of annual interest rates. If we were disclosing the annual interest rate 18 on 100, I mean the math isn’t that hard, right? I borrow 18 let’s assume every two weeks, okay?
Ted Michalos: Which is what the average person – the payday loan lenders don’t tell you how long it takes to actually stop using them, which would be a stat I would love for them to publish too.
Doug Hoyes: Yeah and in a lot of cases it’s forever. So, I go in, I borrow $100 two weeks later I pay it back with interest so I’m paying back $118. And then I borrow again, I do that all year long so I’m doing it 26 times so $18 times 26 times is -?
Ted Michalos: 468.
Doug Hoyes: $468. So, since I’m borrowing $100 the interest rate is 468%.
Ted Michalos: And that’s an easy example. Get your head around that folks. You borrow $100 and you pay it back every two weeks, at the end of the year you’ve paid $468 in interest on your 100 bucks.
Doug Hoyes: And a high interest credit card is what?
Ted Michalos: 29%.
Doug Hoyes: So, 468’s a lot more.
Ted Michalos: Well, and the government sets usury at 60%. That’s why those installment loans are at that rate. Anything higher than that is criminal.
Doug Hoyes: And the only reason this isn’t criminal is there’s a specific prohibition in the criminal code that gives them an out. It says oh well, if you’re a payday lender you’re okay.
Ted Michalos: If you’re a payday lender you’re allowed to be a criminal.
Doug Hoyes: Oh now we’re going to get letters from the payday loan industry too.
Ted Michalos: Yes we are.
Doug Hoyes: So my point is if you went into a payday lender and instead of them saying oh it’s only 18 on 100 they said the interest rate is 468%, would that mean something different? I don’t know but I don’t see how it can hurt.
Ted Michalos: Well, at least then you’re making an informed decision and you’re not diluting yourself that it’s 18%. I mean our assumption is that part of this – I mean I know you need the money, that’s why you’re going there and you don’t think you can get the money anywhere else. But you say okay, it’s $18 on 100, it’s not a big deal. If somebody had a big sign behind the counter that said no, no it’s 468 bucks on 100, my guess is you’d reconsider.
Doug Hoyes: And over the course of the year that’s exactly what it is. But because you’re paying it in two week increments, it looks like a smaller number. So, we’re big fans of disclosure, the cost of borrowing. It doesn’t cost any more to do that, it’s not that complicated.
Ted Michalos: And if you made the decision then you’ve made the decision, yeah. We’ll respect it. I won’t be impressed by it but at least we’ll respect it.
Doug Hoyes: Yeah. We’re certainly not saying oh, all payday lenders must be shut down because all that does is drive people underground. Let’s make it obvious what they’re doing and then let the consumer decide.
So, our third recommendation has to do with credit bureau reporting. So, based on our review of our client’s credit bureau reports and we get them all the time, they bring them in so we can take a look at them. A lot of short-term lenders do not report active payday loans to the credit reporting agencies, I’m talking about Equifax and TransUnion here. Some of them are starting to but it’s kind of hit and miss at the moment.
So, as a general rule no, they don’t because it lasts for such a short period of time that by the time you report it, it’s already gone. Our opinion is they should be reported and I think there’s two reasons for doing that. So, Ted what’s the first and most obvious reason for reporting these things to credit bureaus.
Ted Michalos: So, the most obvious reason is so there’s a record so people can see how many of these things you have, what your total debt is and they can see the pattern of borrowing.
Doug Hoyes: And that, when you say see it, obviously the payday lenders can see it but so can the other lenders.
Ted Michalos: Any other lenders, that’s right.
Doug Hoyes: And so hey, wait a minute, there could be some hidden loans here that are a problem. Now I think a second good reason for reporting to credit bureaus is I think it actually helps the borrower.
Ted Michalos: I agree.
Doug Hoyes: Because if you are paying back these payday loans, then that in theory should be improving your credit score.
Ted Michalos: Right, particularly when you take into account the interest. So, I mean the whole idea behind a credit report is not necessarily to help you the consumer, it’s to help the lenders. It’s to show a pattern of your handling credit responsibly. So, our argument is if you’re paying off the loan the way you’re supposed to be then you should get credit for paying off the loan.
Doug Hoyes: And so as a result of that you may then be able to qualify for more traditional lending. Maybe you can get an actual credit card, bank loan line of credit because you’ve now built up a positive history.
Ted Michalos: What I’m waiting for is the major banks to get into payday lending because then they’ll keep switching you to new products. But I don’t see that coming.
Doug Hoyes: Well, in Vancouver it’s already happened, VanCity Credit Union. And you can send us an email over at hoyes.com if you’re going to be offended by what we’re about to say. But in effect a few years ago they did get into the short-term lending. And of course they promote it as being much more positive, they’re not charging the maximum rates. They’re trying to work with customers, they’ve got longer repayment terms and so on. And so yes, I would agree it’s probably not as quite as bad as a traditional payday loan but it is still a serious problem.
So, let’s get into some recommendations here. because we’ve talked about all the numbers, people are listening to us here, we’ve already said what we would recommend the government do and of course they didn’t invite us so, you know, we are however sending a written report to them so they will have our recommendations.
Ted Michalos: You know what’s fascinating when they were doing the research for this they did a dog and pony show across the province. And we attended a couple of those and they got all our reports from the past so they’re aware of all these numbers, they were intensely interested in fact, we got follow up emails asking for explanations.
Doug Hoyes: Oh yeah and I’ve talked to civil servants who are in the departments who craft this legislation. So, yeah they’re absolutely aware of it and I’m not saying the government’s deliberately stone walling us or anything like that. I mean maybe they are, maybe it’s a conspiracy but it could be as simple as like the hearings go from 4-6:30pm, three nights. They’re in –
Ted Michalos: And they know exactly what we were going to say.
Doug Hoyes: Yeah, so okay maybe there’s a perfectly valid reason why Doug and Ted don’t get to go to Toronto. But that’s the government side of it, let’s talk about people now. So, okay what are your comments then Ted on payday loans in general and if someone has payday loans, what should they be thinking about, what should they be doing?
Ted Michalos: So, ladies and gentlemen, the first thing you have to recognize is that the payday loan in and of itself is not the problem, the payday loan is the symptom, particularly if you have multiple payday loans. If you find yourself having to borrow, one, two, three or more as many of our clients do, there’s an underlying issue. You’ve already got too much debt, you’re over extended, you need to assess what you’re doing and change the way you’re doing it. What’s the definition of insanity? just keep doing the same old thing and expecting a different result. Payday loans are so insane.
Doug Hoyes: So, okay I’m thinking of getting a payday loan because I’m tapped out everywhere else, that’s the common reason. What else can I do? I mean I’m strapped, I got my rent is due in three days and my paycheque comes out in six days, what am I supposed to do?
Ted Michalos: Yeah. Alright well, so let’s start with some basic ideas. Figure out who the next most pressing creditor is, and the example you just gave Doug is the rent, and talk to them. See if they’re willing to give you three days before you have to pay the rent. Most landlords are. This won’t solve your long-term problem but it will stop you from going and getting that payday loan, which will just make all your other financial problems worse.
So, negotiate with the people that you owe. You will find most of them will be helpful because they recognize at some point if you get to the point where you can’t pay their debts, you’re going to look to other solutions and we’re going to talk about those too.
Doug Hoyes: Yeah. And I guess, well, the prime other solution if you have a whole bunch of debts, and again we’ve already said it, the person who is our client who has a payday loan has in total around $34,000 of unsecured debt of which around $3,000 is payday loans. Well, that means there’s, you know.
Ted Michalos: Credit cards, lines of credit, installment loans.
Doug Hoyes: Which are the real problem. You already said it, the real problem is not the payday loan, that’s a symptom. The real problem is the overall level of debt. So, okay I’ve got too much debt, obviously I need to be talking to a Licensed Insolvency Trustee, like you or me, what kind of things are you going to tell someone in that situation?
Ted Michalos: Well, so if you’ve got too much debt you need to look to first why did you acquire and what can we do to either rationalize it, restructure it or maybe you’ve got to do something to reduce it. So, the first thing we always ask is there some way that you can restructure your debt? Get a consolidation loan or a line of credit or something so you can take some of these more expensive forms and pool them together. If you can access a new loan at a traditional lender, that’ll stop you from needing that payday lender. And that’s critically important compared to this. It doesn’t solve the overall problem but it may make your cash flow more manageable.
I mean there are other solutions to consider when you’ve got excessive debt. We do shows about this all the time. So, should you do something called a debt management program where there’s no new interest on your debt, you repay them over time. Should you be looking at a legal remedy consumer proposal or worst case scenario, bankruptcy? We don’t want to turn this show into a discussion about those solutions, we’ve done shows on them. It’s just that if you’re at the point where you’re dealing with more debt than you can handle, probably you don’t have the skills yourself. You need to look at outside the box, talk to a professional. You got sore tooth, you go see a dentist, you got excessive debt, you should go see a Licensed Insolvency Trustee.
Doug Hoyes: Well and ask yourself a simple question if I do nothing if I keep going the way I’m going what will happen, what will change? So, I’ve got a payday loan, I’ve got –
Ted Michalos: No, I’ve got three payday loans.
Doug Hoyes: Three payday loans, I owe $3,000, next week I’m going to have to come up with, you know, $3,500, $4,000 to pay these things off plus interest. I’m not going to be able to do it unless I go and get even more payday loans and continue the cycle. At some point you’ve got to jump off the hamster wheel. The cycle has to end, that’s the only answer. So, if you’ve got one payday loan, you’ve got your tax refund coming in next week and you can pay it off, great, fine. You know, lesson learned. But if you’ve got multiple ones, ask yourself that basic question, is it possible to pay it off?
Ted Michalos: Yeah, remember what we said, the average person we see owes $1.21 for every dollar of take home pay, just in payday loans.
Doug Hoyes: Yes, so this is of our payday loan clients, that’s a huge number. You can’t pay it back.
Ted Michalos: Well, you can’t. I mean if you owe $3,000 and you’re only going to get paid $2,300, how do you pay if off? You can’t, you’ve got to borrow another $3,000 plus the interest.
Doug Hoyes: Yeah, you can’t argue with math. I think it’s as simple as that. Well, I think that’s a great way to end it. There are some practical tips there. What I would encourage everyone to do is go to our website at hoyes.com, we have tons of links to all the previous shows we do. We’ve also got links to how you can deal with payday loans, what some of the alternatives are, it’s all there. So, hoyes.com is where all that can be found.
So, my final thought on all of this is I’m not a big believer in the power of government to help us make good decisions. I don’t think Ted’s probably a big believer in that either.
Ted Michalos: This particular government or government in general?
Doug Hoyes: Well, I mean frankly governments in general, I’m not sure they’re the solution. I mean I believe that the only way to eliminate the catastrophe that is payday loans is for people to stop getting them. If there were no customers, there would be no payday loans and there would be no need to have committees to pass laws to regulate them.
That’s why Ted and I wanted to appear before the committee of the legislature to share our research in an attempt to shine a light on this problem. That’s why we write blogs and appear in the media, that’s why we do this podcast. Understanding the true cost and implications of payday loans and understanding the alternatives should show everyone that high interest short-term loans are not the answer.
But it’s not just the numbers that matter. I already made the point that 60% of Ontarians aged 18 to 34 surveyed in our Harris poll last year said they would definitely or probably recommend payday loans to family, friends and coworkers. So, how is that possible with interest rates of 468%? Is it as simple as they don’t understand the math? Well, sure that’s a part of it, which is why we’re arguing for better disclosure. But there’s more to it than that.
Have you gone into a traditional bank lately? They’re reducing the number of actual human employees. They want you to do everything online or at one of their machines. There’s a new branch of a big bank that just opened near our office in Kitchener and there are no tellers. But there are four bank machines for deposits, cash withdrawals and you can even get U.S dollars from one of the machines. That’s where the banks are going, fewer employees, more machines. And that branch doesn’t even open until 11:00 A.M. That’s why all the bank stocks in Canada are at record highs, they’re making lots of money using more technology and fewer people.
But what if you’re someone who wants to deal with a real person? What if you want to cash your paycheque and you need the cash now and you don’t want to use a machine? What if your cheque is from a new employer and the bank wants to put a 10 day hold on it and you need the cash now? There’s an answer, payday loan places. They’re happy to cash your cheque for you, no questions asked. Sure they charge a high fee, but they won’t ask for a lot of I.D, they won’t put a 10 day hold on it and they have lots of stores with extended hours and their people are friendly. And hey, while you’re in there cashing a cheque, maybe we can give you a payday loan as well. That’s a big reason why people go to payday loan stores. They’re more friendly and more convenient than the big banks so the cost is less of an issue.
If you’re a banker listening to this, take note. The payday lenders have found a way to compete with you and in some areas, they’re winning. And if you’re listening to this and you’ve never gotten a payday loan and you think people get them just because they’re naive, think again. Many people make a conscious decision to avoid the banks because they prefer the service at payday loan places. They are actually making a rational decision. Think about it.
That’s our show for today. Full show notes including links to everything we discussed and links to all of the applicable legislation and our submission to the subcommittee can be found at hoyes.com that’s h-o-y-e-s-dot-com and all of the stats that we talked about regarding payday loans can be found on a special link joedebtor.ca/paydayloans.
Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.