Payday Loans and Bankruptcy

Despite consumer warnings about the high cost of payday loans, heavily indebted insolvent consumers are using payday loans more than ever before. An update of the Hoyes, Michalos & Associates Inc. Joe Debtor bankruptcy study for 2017 insolvencies reveals that 3 in 10 insolvencies in Ontario involve payday loans. The use of payday loans among insolvent borrowers increased for the sixth consecutive year to 31% of all Ontario insolvencies, up from 27% in 2016.

Struggling debtors are taking out fewer, but larger loans. The problem is high-cost, longer term loans do not help someone who already carries a significant debt load.  In fact, it makes their situation much worse.

Lowering the cost of payday loans in Ontario recently may have made this form of borrowing marginally cheaper, however the increased use of payday loans among indebted consumers makes payday loans a leading contributor to consumer insolvencies in Ontario. That is why today, 3 in 10 Ontario insolvencies involve payday loans.

Below are some additional findings from our updated study.

Payday Loan Use on the Rise Among Insolvent Debtors

High cost payday loans continue to be a debt of last resort for an increasing number of Ontarians struggling with debt.

This is the sixth consecutive year-over-year increase since Hoyes Michalos began to study the impact of payday loans on consumer insolvencies in Ontario. Insolvent borrowers are now 2.6 times more likely to have at least one payday loan outstanding when they file a bankruptcy or consumer proposal than in 2011.

Note: Hover/click on bars in graphs to see more data

Joe Debtor is using payday loans not only to meet an emergency expense, but to keep up with existing debt repayment. He is increasing his debt burden such that payday loans become a leading contributor to his filing insolvency.

How Are Debtors Using Payday Loans?

The composition of consumer debt held by the average insolvent debtor has changed significantly. Traditional bank debt and lines of credit still account for most of Joe Debtor’s personal loans; however, the use of alternative lending products has grown.

While insolvent debtors are highly likely to borrow from multiple payday loan lenders, they are taking out fewer, but larger loans according to our updated research. The average number of payday loans outstanding at the time of insolvency declined to 3.2 in 2017, after peaking at 3.5 loans in 2014.

That may sound like good news, however, the average payday loan size has increased significantly in recent years. In 2017, the average individual payday loan taken out by an insolvent debtor was $1,095, an increase of 12.4% from $974 in 2016.  What is more concerning however is that 1 in 10 (9%) loans are $2,500 or more, up from 6% in 2016.

Why Are Debtors Using Payday Loans?

The average insolvent payday loan borrower owes $3,464 in payday loans, or $1.34 for every dollar of monthly take-home pay. They owe more in payday loans than they make in a month.  In addition, they owe, on average, an additional $29,997 in other unsecured debts.

Why has payday loan debt increased despite consumer warnings about the high cost of these loans? Simply put: cash flow. Struggling financially without access to additional available credit, debtors turn to a payday lender to make ends meet. Heavily indebted consumers are also turning to payday loans to keep up with existing debt repayment. Unfortunately for most, this starts a cycle of borrowing that leads to multiple payday loans.

We see clients using larger and longer-term payday style loans more than ever before. Payday loan companies, and online lenders, now offer a wider array of products including larger and longer-term cash loans.  Payday loan lenders are now an alternative lending source for those with poor credit, offering easy access to much larger and longer terms loans. The problem is high-cost, longer term loans do not help someone who carries an average unsecured debt load of $33,461.  In fact, it makes their situation much worse.

Who Is Using Payday Loans?

It is a common misconception that payday loans are used primarily by low-income earners. Our study of insolvent debtors confirms that middle- and higher-income earners are much more likely to use payday loans to excess. The average monthly income for a payday loan borrower is $2,589, compared to $2,478 for all debtors. Payday loans are more likely to be used by debtors with an income over $4,000 than they are to be used by those with an income between $1,001 and $2,000.

High-income earners are also much more likely to have taken out multiple payday loans than are lower-income earners. Payday loan borrowers with a monthly income over $4,000 have an average of 3.6 payday loans outstanding, while debtors with incomes between $1,001 and $2,000 have 3.1 loans at the time of their insolvency.

Young Debtors Use Payday Loans More Often, Seniors Borrow More

Younger debtors are much more likely to use payday loans than are older debtors, although their average loan size is much smaller even in terms of their income level. Today almost 1 in 2 (45%) insolvencies for those aged 18-29 involve payday loans.

Debtors aged 30 to 59 take out the highest number of payday loans, while seniors have the largest average loan size at $1,568 and the highest overall payday loan debt at $4,377.

Payday loans
by age group
18-29 30-39 40-49 50-59 60+
% with payday loan 45% 32% 31% 28% 14%
Payday loan debt $2,605 $3,379 $3,796 $3,956 $4,377
Payday loan as a
% of income
117% 126% 132% 156& 176%
Number of loans 3.1 3.2 3.2 3.2 2.8
Average payday loan size $835 $1,041 $1,186 $1,254 $1,568

How to Avoid the Payday Loan Cycle

Most clients tell us they know payday loans are an expensive borrowing option, however they turn to payday loan companies to keep all their other debt payments current for as long as they can.

For someone dealing with significant unsecured debt, they need a more robust debt solution. The earlier they speak to a professional like a Licensed Insolvency Trustee, the more options they have available to get those debts under control.

For someone who is using payday loans occasionally to meet emergency expenses, consider lower cost alternatives to payday loans including taking out a small loan from a bank or credit union, getting a secured credit card if access to credit is the issue, using overdraft protection and even negotiating payment terms directly with your creditor. In the longer term, build up a small emergency fund that you can turn to instead of payday loans.

How Can We Improve the Payday Loan Industry?

Recent legislative changes to lower the cost of payday loans, and lengthen the period of repayment, are not helping heavily indebted borrowers.  The maximum allowable cost of borrowing under a payday loan agreement was $21 for each $100 borrowed prior to January 1, 2017, was lowered to $18 per $100 in 2017, and effective January 1, 2018 is now $15 for each $100 advanced. They may in fact be making the situation worse by making payday loans temporarily more affordable.

Hoyes Michalos believes that payday legislation must reduce the risk of consumers taking out multiple payday loans from multiple lenders and borrowing more than their income will allow them to repay.  We strongly believe that consumers should be provided with relevant information so that they can make an informed decision, and as such we recommend that payday lenders be required to:

  • Advertise the annual percentage rate cost of borrowing, and not merely the “cost per $100” as is current practice;
  • Report all short-term loans to the credit reporting agencies, so that lenders are aware of excessive existing payday loans, but also so that borrowers can benefit from an improved credit score when they repay those loans;
  • Discontinue the use of teaser ‘introductory rates’ that only serve to encourage excessive short-term borrowing; and
  • Provide overly indebted borrowers with information on all their debt management options.