Payday Loans and Bankruptcy

Despite consumer warnings about the high cost of payday loans, and changes made to legislation around payday loans to reduce risks to consumers, heavily indebted insolvent consumers continue to use payday loans more than ever before.

Our annual Hoyes, Michalos & Associates Inc. study on bankruptcy and payday loans for 2018 reveals that almost four in ten insolvencies in Ontario involve payday loans and the pace of use among heavily indebted borrowers continues to increase.

As we shall see in this report, insolvent debtors are highly likely to borrow from multiple payday loans lenders and end up owing more in payday loans than they make in a month. What is also concerning is the rise in use of high-cost, fast-cash installment loans and lines of credit offered online and through traditional payday loan lenders; a significant contributing factor to their financial problems.

Payday Loan Use Continues to Increase

In 2018, 37% of all insolvencies involved payday loans, up from 32% in 2017.  This makes the seventh consecutive year we have seen growth in the use of payday loans among insolvent borrowers since we began our study.

Insolvent borrowers are now 3.1 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

Source: Hoyes, Michalos

How can this be, given recent changes in payday loan legislation in Ontario designed to reduce the risks of borrowing for consumers?  In addition to lowering costs, some of these changes were designed to reduce loan sizes and provide relief for repeat borrowers including:

  • Setting payday loan size caps. Beginning July 1, 2018 lenders cannot lend more than 50% of a borrower’s net pay.
  • Providing for an extended repayment period for repeat borrowers. Beginning July 1, 2018, lenders must offer an extended repayment period if borrowers take out three loans within a 63-day period.
  • Limiting fees to $15 per $100 borrowed for two weeks effective January 1, 2018.

Yet for the heavily indebted borrower, these changes have not helped.

The reason is two-fold:

  1. Payday loan borrowers circumvent some of these rules themselves by visiting more than one lender.
  2. The payday loan industry itself has adapted. Payday lenders, and new online lenders, are moving beyond traditional payday loans by offering larger dollar, high-cost, fast-cash installment loans and lines of credit. The problem is this type of easy access credit does not help someone who already carries a significant debt load.  In fact, it makes their situation much worse.

payday loan line of credit

To accurately track the impact of the payday loan and fast-cash lenders on heavily-indebted borrowers, Hoyes Michalos restated its definition of a payday loan to include loans from any company offering fast approval, instant cash, high-interest loans with no or little credit check, whether repayable in two weeks or as a longer-term cash loan. Not included are high cost installment loans used to fund asset purchases such as furniture loans or for which there is some form of credit review process. For simplicity we will refer to these loans collectively as payday loans since the majority are still traditional payday loans. However, as we shall see, a rising percentage of these loans are now larger, high-cost installment type loans.

Heavy Borrowers are Taking Out Multiple, Repeat Loans Simultaneously

High cost payday loans continue to be a debt of last resort for an increasing number of Ontarians struggling with debt. The cycle is simple. Joe Debtor needs cash, often because pre-existing debt payments consume much of his paycheque. He visits his first payday loan lender and takes out his first payday loan. In two-weeks he needs to pay off the first loan. Unfortunately, he still has negative cashflow so visits a second payday loan store to borrow money to pay off the first. He may even borrow more, through a larger installment loan, attempting to get ahead of the cycle. Ultimately, high interest consumes more and more of each pay such that he finds himself indebted to several payday lenders simultaneously.

In 2018, the average insolvent debtor owed a total of $5,174 in payday loans to 3.9 different lenders.  In aggregate, he now owes more than 2 times his total monthly take-home pay in loans with interest rates ranging from 29.99% to 59.99% for a fast cash installment loan to 390% for a traditional payday loan.

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

Source: Hoyes, Michalos

While the average insolvent payday loan debtor has 3.9 outstanding payday loans, less than one in four have only one loan while a staggering 6% owe at least 10 different payday lender locations. Multiple loans are not hard to obtain because most payday lenders do not report loans to the credit bureaus and there is no central database to track payday loans.

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

Source: Hoyes, Michalos

Loan Sizes Are Increasing

In addition to taking out more loans, the average payday loan size has increased significantly in recent years. The average individual payday loan size among insolvent borrowers in 2018 was $1,311, 19% higher than in 2017.  

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

Source: Hoyes, Michalos

What is also alarming is that the pace of growth has accelerated in 2018 as indebted borrowers take out an increasing number of larger, fast cash loans. Payday loan companies, and online lenders, now offer easier access to a wider array of products including larger, longer-term cash loans and even quick access lines of credit up to $15,000.

In 2018, 15% of all individual payday loans in our study were for $2,500 or more, up from 9% in 2017 and barely 1% when we started our study in 2011. This is the result of easy access to higher dollar loans for those with poor credit – more debt.

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

Source: Hoyes, Michalos

High Cost Loans Escalate Debt Burden

And the cost of these loans has a staggering impact on the heavily indebted borrower as well.

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 and fast cash loans become a leading contributor to his filing insolvency. For the average insolvent payday loan borrower, high-interest payday loans account for 14% of his total debt.

In addition to payday loans, the average payday loan borrower owes a further $30,654 in other unsecured debt. He actually owes 27% less total debt than the average Joe Debtor. Yet his borrowing costs are much higher.  Based on his mix of loans, the average insolvent payday loan borrower is paying $1,852 a month in interest1, or 70% of his take-home pay in interest alone.  This is why this type of debt creates a cycle that can only be broken by filing a bankruptcy or consumer proposal.

Who Is Using Payday Loans?

In addition to knowing how payday loans are used by the average insolvent debtor, we also know who is more likely to be using payday and fast-cash loans by demographic.

No Gender Divide

Women debtors are as likely (38%) to use payday loans to excess as male debtors (37%) although they do take out more, individual smaller loans.

Payday Loans by gender Female Male
% with payday loan 38% 37%
Payday loan debt $5,125 $5,222
Payday loan as % of income 192% 198%
Number of loans 4.1 3.8
Average payday loan size $1,232 $1,394
% $2,500+ 14% 15%

Young Debtors Use Payday Loans More Often, Seniors Borrow More

Younger debtors are much more likely to use payday loans than are older debtors.

Today almost 1 in 2 (48%) insolvencies for those aged 18-29 involve payday loans.

Payday loans
by age group
18-29 30-39 40-49 50-59 60+
% with payday loan 48% 43% 37% 28% 21%
Payday loan debt $4,396 $5,189 $5,723 $5,255 $5,224
Payday loan as a
% of income
183% 191% 209% 192% 199%
Number of loans 4.0 4.1 4.1 3.4 3.1
Average payday loan size $1,224 $1,219 $1,382 $1,424 $1,639
% $2,500+ 13% 13% 15% 17% 20%

Debtors aged 40 to 49 have the highest overall payday loan debt. They are more likely to use multiple loans (an average of 4.1 each) and 15% have loans of $2,500 or more. It is also interesting to note that payday loan debtors in this age group are more likely to be women.  In 2018, 41% of female insolvent debtors aged 40-49 had at least one payday loan versus 34% for male debtors of this age.  Women debtors in this age group are significantly likely to be single, separated or divorced (71% combined) while raising children alone (35% are lone-parents) on a single income. They turn to payday loans to help make ends meet.

What is still concerning is the continued rising use of payday loans among indebted seniors.  More than two in ten (21%) insolvent senior debtors (aged 60+) have an outstanding payday loan, up from 15% in 2017. Borrowing against a stable pension, seniors take out the largest loans with an average loan size of $1,639.  And more than 20% have loans of $2,500 or more which suggests they are much more likely to be using high dollar, high-cost, fast cash loans.

Payday Loans Are Not Just for Low-Income Borrowers

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 $2,654, compared to $2,530 for all insolvent debtors. Payday loans are most likely to be used to excess by those with net monthly incomes between $2,000 and $4,000.

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

Source: Hoyes, Michalos

High-income earners also take out more multiple loans than lower-income earners. Payday loan borrowers with a monthly income over $4,000 have an average of 4.6 payday loans and a total payday loan debt of $7,388 outstanding, while debtors with incomes between $1,001 and $2,000 have 3.2 loans and a total payday loan debt of $3,079 at the time of their insolvency. Surprisingly however, there is no difference in the percentage of borrowers taking out loans over $2,500 by income level.

Payday loans
by income group
$0 – $1,000 $1,001 – $2,000 $2,001 – $3,000 $3,001 – $4,000 $4,000+
% with payday loan 17% 32% 42% 43% 34%
Payday loan debt $3,079 $3,947 $5,171 $5,899 $7,388
Payday loan as a
% of income
569% 242% 205% 172% 152%
Number of loans 3.2 3.5 4.0 4.1 4.6
Average payday loan size $1,335 $1,280 $1,294 $1,361 $1,315
% $2,500+ 15% 14% 15% 15% 15%

Does Limiting Locations Help?

During 2018 several Ontario cities enacted new bylaws to limit the number and location of payday loan businesses within city limits.  Hamilton was the first city to regulate the number of locations in early 2018.

While it is still early, we are tracking the potential impact of these changes on the heavily indebted borrower.

Comparing the average number of payday loans outstanding at the time of insolvency between the Region of Hamilton and the average Joe Debtor, it does not appear that these changes are helping.

The number of payday loans owed by insolvent borrowers in Hamilton region grew by 2% from 2017 to 2018, less than the 10% growth for Joe Debtor however Hamilton still has more payday loans per debtor than the provincial average. In 2018, the average insolvent payday loan borrower in the Hamilton region had 4.1 outstanding payday loans at the time of their bankruptcy or consumer proposal, compared to 3.9 for Joe Debtor.

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

Source: Hoyes, Michalos

While it is early and the number of payday lenders in Hamilton remains higher than their long-term target, the reason this may not work is that heavily indebted borrowers, who are willing to take out multiple loans simultaneously, are willing to travel to get a loan. In addition, many payday loan companies now operate online.  With the high percentage of young payday loan borrowers, online access will be hard to regulate.  Sadly, even the increased media attention around the high cost of payday loans has not seemed to deter heavily indebted borrowers.

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 lowered to $15 per $100 effective January 1, 2018. This 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 obtaining credit well beyond their ability to repay. 

We strongly believe any legislation falls short unless it limits excessive access to credit, and as such we recommend that payday lenders be required to:

  • Report all short-term loans to the credit reporting agencies, so that lenders are aware of excessive existing payday loans. This has an extra benefit for borrowers who may also see an improvement in their credit score when they repay those loans;
  • Discontinue the use of teaser ‘introductory rates’ that only serve to entice a borrower onto the payday loan cycle; and
  • Provide overly indebted borrowers with information on all their debt management options.


1 – Debt servicing costs for the average insolvent payday loan borrower as estimated by Hoyes Michalos

Borrowing Costs Payday Loan Borrower Interest Rate Average Joe Debtor Interest Rate
Payday loansa $5,174 347% $1,919 340%
Personal loans $11,110 13% $15,025 13%
Credit card debt $7,469 19% $15,905 19%
Taxes $4,562 5% $8,835 5%
Student loans $2,954 7% $2,597 7%
Other debts $4,558 25% $5,008 25%
Estimated blended rate $35,828 35% $49,289 27%
Estimated monthly interest  $1,852   $1,115  
a – average for all debtors, blended rate between traditional & installment