CITY TV Edmonton Nov. 6 | 5:02 PM
It's now estimated that there are more payday loans stores in Canada than McDonald's outlets. Short-term lenders are popping up all over the country and they're in big demand. Their business model is simple: offer customers short-term loans with high interest rates. And for some, they are the perfect solution for cash woes.
"When bills come up ahead of time and you're not ready for them- car breakdowns or whatever- and you need a little extra cash (they're) not a problem," says Robert Shanks, who occasionally takes out payday loans.
But what is a problem, some say, are the interest rates these companies are charging. Katrina McKeown is an organizer with advocacy group ACORN, which is lobbying the government for stricter rules for payday companies. "The Criminal Code ofCanada says you can't charge more than 60% interest. They're charging upwards of 300% into the thousands," comment McKeown. "Our members had a lot of problems with this industry so that's when we started researching it and realized that it's actually illegal and completely unregulated in Canada," she added.
So we decided to take a look for ourselves. City News took out three $100 loans from three different companies to compare prices and fees. Here's a look at what we got:
Money Mart loan:
- $100 loan for eight days
- Interest charged - 89 cents
- Brokerage fee - $16.75
- Total cost for loan - $17.64
Cash Money Cheque Cashing Inc. loan
- $100 loan for 8 days
- Interest charged - $1.29
- Brokerage fee - $18.71
- Total cost for loan - $20
Instaloan loan
- $100 loan for 8 days
- Interest charged - $1.91
- Brokerage fee - $29.50
- Insurance fee - $3.29
- Cash card fee - $8
- Set-up fee - $10
- Total cost for loan - $52.70
As illustrated above, the rate at Instaloan was more than the other two lenders combined. Instaloans also had the stiffest default charges. Here's what you'd pay if you bounced a cheque at each of the lenders.
Default fees
- Instaloan - $125
- Money mart - $35
- Cash money - $37.50
So we asked company spokesman Dave Morrison to explain. "We're not exploiting anybody. Everything is very clear to them. What they would be paying. They all understand it long before they leave the store," says Morrison.
So who uses payday loans? Here's the portrait of an average user. Most are male, about 35 years old, and earn less than $30,000 a year. Less than one third of payday loan users are college educated and about a third live paycheque to paycheque.
Rhiannon McMillan was once a payday loan junkie. Over the course of three years she says she paid over $10,000 in interest. Now, she's criticizing the industry's business tactics. "They set up their business in places where banks have left the communities," says McMillan. "They're in lower income communities. So you don't see them setting up shop in west Vancouver or more affluent neighbourhoods."
She added, "You end up having to take out two or three different loans from a few different companies to cover. Basically you build yourself up a pyramid of debt."
But what about those fees? Are they really illegal? Technically they are but it's difficult to prosecute the companies.
That specific law has long been considered archaic and ill designed for the payday industry. So things are about to change.
Last month the federal government introduced legislation that would give the provinces the ability to regulate this business themselves. And Alberta is eager to do just that.
Government services minister George Vanderburg says future regulation needs the input of both consumer groups and payday players.
"There are players in this industry that are not up front with how they treat their customers and we need to make sure there's legislation that protects the customer when they walk into those businesses," says Vanderburg.
Stan Keyes, the President of the Canadian Payday Loan Industry, says short term lending needs regulation in hopes of weeding out rogue lenders.
"There is a need for this industry in Canada and while some industries are shy about regulation we're asking for this regulation. Those stores or organizations that don't want to play within the rules will not play within the rules and they will go their own way," says Keyes.
Vanderburg adds, "Whatever we come up with it has to be clear and it has to be easy to understand and it can't be in small print. It has to be up front."
Until then, consumers will be left to fend for themselves in the lucrative - sometimes dangerous - world of short-term borrowing.
Here's a look at what form regulation is likely to take:
The Canadian Payday Loan Association is lobbying the provinces to put in place what's known as a "dollar per hundred" system. This would effectively cap the amount a payday lender can charge per $100 it loans.
In 2004, accounting firm Ernst and Young released a report indicating that the average loan it gives out costs payday companies about $15 for every $100 it loans. As a result, the cap is likely to be higher than that to allow those companies to make a profit. Provincial governments have been warm to that idea because it's easy for the consumer to understand.
Quebec is the only province in Canada that has banned payday loans. Meanwhile, Manitoba will become the first province to regulate the industry when federal legislation is passed, which is likely to happen in the coming months.
For a look at Manitoba's draft legislation for the Consumer Protection Amendment Act (Payday Loans) visit http://web2.gov.mb.ca/bills/sess/b025e.php