High interest rates prompt review of real payday loan costs
- By Myrrhanda Novak
- Producer: Steve Rennie
OTTAWA | Oct. 20, 2006 — The Manitoba government has introduced legislation to protect people who turn to payday loan companies when money is tight.
But they can't do it without the federal government's help. The governing Tories have proposed a new law to give provinces the authority to regulate the payday loan industry.
The industry wants to be regulated, says Stan Keyes, the president of the Canadian Payday Loan Association. The group represents companies such as Money Mart and Cash Money, which offer short term loans — known as payday loans — of less than $1,500.
To be approved for a loan, customers only need a steady income and a post-dated cheque. Borrowers must repay the loan by their next payday along with interest and fees.
It's a very convenient service that banks are not providing, Keyes says. Members of the association follow a very strict code of business standards, he says, but not all payday loan vendors follow this code.
"In this business, like in all businesses, there are bad apples," Keyes says.
"There are those who will gouge consumers."
"These lenders do nothing but feed into the cycle of poverty. They give nothing back to the community," says Bernice Getty, the executive director of the North End Women’s Centre in Winnipeg. The centre helps women in one of the poorest, most violent areas in Canada.
Payday loan stores have taken over Winnipeg’s North End, Getty says. There are no banks within a 20-block radius, she adds.
Manitoba wants to regulate industry
The Manitoba government hopes new regulations will help protect those who borrow money from payday loan vendors, says Nancy Anderson, director of the Consumer’s Bureau. Manitoba is the first province to try to regulate the payday loan industry.
The proposed legislation will give borrowers in Manitoba 48 hours after accepting a loan to change their mind. Customers will also be forced to pay off one payday loan before taking out another.
Lenders will have to be clearer with clients about service costs.
The bill is in its final stages, but the province needs authority from the federal government before the proposed law, if passed, could be enforced.
The federal government has introduced legislation to do just that. The legislation will allow provinces to set their own industry standards. If a province does not create its own regulations, lenders in that area must operate under the Criminal Code, which limits interest rates to 60 per cent per annum.
This current limit is not really being followed, says Michael Jenkin, Industry Canada's Director of Consumer Affairs.
Including service fees, payday loans can cost borrowers as much as 1,000 per cent interest, according to a federal report on payday loans. The Criminal Code defines interest broadly as the cost of borrowing, Jenkin explains. Service fees need to be part of the cost calculation.
But Keyes says members of his association must be allowed to charge rates that keep them viable, as long as they are honest about the costs. "We need to find the balance between the needs of the consumer and the needs of the business to make a profit," Anderson explains. "They are providing a service."
No other options
Charity Kennedy agrees. She says some people have no other options. For more than half a year, Kennedy borrowed money every two weeks to help pay her rent and buy food. "It's an addiction, just like gambling," she says. "It's just like one beer after another."
Her financial trouble started three years ago, she says, when she went back to school to get her master’s degree.
When she couldn't pay them off quickly enough, Kennedy says he turned to payday loans. Her average loan was for about $500, and two weeks later, she'd have to pay back $575.
"I realized, wow, this is really costing me," she says. "And I haven't taken out a loan in eight months."
Government regulation is desperately needed, Kennedy says, because the industry is taking advantage of people who don't know where else to turn.
People should only turn to payday loans in an emergency, Keyes says.
"When you need to put a muffler on your car today, and the bank won't let you cash your cheque until next week, we provide a valuable service," he says.
He adds the association is working with the provinces to develop legislation that prevents an unhealthy reliance on the service.
Ottawa intends to give authority to the provinces as quickly as possible, Jenkin says, but it is tough to foresee how long a bill will take to pass, especially in a minority government.