Manitoba caps payday loan interest rates; Industry warns of closings, credit shortage
- PUBLICATION: The Globe and Mail
- PAGE: B20
- DATE: Saturday, April 5, 2008
Manitoba has become the first province in Canada to slap payday loan companies with caps on the interest rates they can charge customers, a move the industry says will throw lenders out of business and drive people to loan sharks and pawnshops.
Under new rules announced yesterday, both fees and interest rates will be reduced by steep amounts. The maximum interest rate will be 17 per cent for payday loans up to $500. Currently, there is not limit.
Manitoba's decision comes as other provinces, including Ontario, are cracking down on the industry for its high fees.
“We've heard lots of stories about people being caught in a debt spiral,” said Gerry Gaudreau, executive director of Manitoba's Public Utilities Board, which issued a 326-page report on its decision. “And we heard lots of consequences, from depression to bankruptcy.”
Payday loans are short-term, high-cost advances that see people through to their next paycheque. Until now, no province has capped the rates they can charge. The federal Criminal Code puts the threshold at 60 per cent a year, though, in reality, some are effectively charging several hundred per cent or more.
There are currently about 1,350 payday “storefronts” in Canada, compared with almost none in the early 1990s, according to the Canadian Payday Loan Association. Low-income families are twice as likely to use payday loans, a Statistics Canada study showed last year.
Manitoba's hearings spanned four months (24 sitting days) and testimony from both consumer and industry groups.
The board recognized its new maximum rates are a “significant” decrease from the averages now charged by the industry, and said it expects some lenders will close. But it stressed the need “to reduce the cost of payday loans for those unfortunate enough to require high-cost loans.”
Much of the concern lies with rollovers – when a borrower can't pay off a loan on its due date and the debt is rolled over into a new loan, with more charges. A typical example, Mr. Gaudreau said, is someone who takes out a payday loan for $100, and is scheduled to repay $125 in two weeks time. The payment can't be made, it's rolled into another loan, and in two more weeks $153 is owed. And so on.
The Canadian Payday Loan Association slammed yesterday's announcement.
“This will throw small and medium companies out of business on a grand scale,” said association president Stan Keyes, who had suggested an interest rate cap of 20 to 23 per cent and may appeal yesterday's decision.
Consumers who need short-term or emergency loans, especially in rural parts of the province, will be forced to use costlier alternatives, such as pawnshops “or on the corner from some unsavoury individual,” he said.
He figures about two million Canadians take out a payday loan a year, a reflection of the deep appetite for such services.
Others cheered the Manitoba announcement, saying the move will put more money in the pockets of those most vulnerable.
“If you look at the board's decision, it's well supported by the American experience,” where the most efficient payday lenders stayed in business even after tight regulations, said Legal Aid Manitoba lawyer Byron Williams, who represented consumer groups during the hearings.
The next steps should be better disclosure, more financial education, and for institutions, such as credit unions, to step in to provide similar, lower-cost services, he added.