Frequently Asked Questions
- What exactly is a payday loan and who uses it?
- What is wrong with the current federal rules?
- How has the CPLA contributed to the consultative process?
What exactly is a payday loan and who uses it?
Payday loans are unsecured small-sum short-term loans typically for a few hundred dollars. The average payday loan is around $280 for a period of 10 days.
They are called payday loans because cash is advanced until the customer’s next payday.
A payday loan is not a form of “revolving” credit that keeps a customer in a permanent debt position. Payday loans are specifically designed to help customers with one-off, unanticipated expenses.
Payday loans are NOT a long-term credit product, nor are they “title loans” (a loan secured with the title to property, such as a vehicle).
Payday loan customers are average Canadians with near-median household incomes. Fifty-three (53) percent are women, 47 percent are men.
A recent survey by Pollara demonstrates that payday loan customers are educated Canadians. They are fully aware of the “dollars and cents” cost of obtaining a loan. They appreciate the convenience and flexibility of the product.
To qualify for a payday loan, a customer must be employed and have a chequing account.
What is wrong with the current federal rules?
s. 347 requires the interest on a loan to be calculated annually, even if the loan is for only five days. As such, the interest is calculated by compounding day after day over 365 days, even if the loan is only held for a few days.
$100 lent for 5 days at a cost of $1 therefore amounts to 107% annual interest. This would be the equivalent of requiring hotels to post their annual room rates at $55,000 per year rather than $150 per night. Payday loans are a short-term product, so annualized rates are the wrong measure of the product’s cost.
Payday loans were introduced in Canada in the early nineties, but the law which controls them – s. 347 of the Criminal Code – was introduced a decade earlier in 1980.
Nearly two million Canadians now use a payday loan every year – but the industry is completely unregulated. While the CPLA enforces a strict Code of Best Business Practices, many non-members regularly employ harmful business practices and gouge consumers.
How has the CPLA contributed to the consultative process?
Since its inception in 2004, the CPLA has maintained close links with the ACCM working group.
The CPLA has also contributed to the consultative process through two independent studies.
The CPLA commissioned the first study in North America on the cost of providing payday loans. Conducted by Ernst and Young, this study shows that payday lending is retail-intensive and that charges for the product fairly reflect the structure of the industry.
The CPLA also commissioned the first comprehensive Canadian survey of payday loan customers. Conducted by Environics, this survey found that customers are informed consumers who value service and convenience. The study also showed that 35 percent of customers have a household income of $50,000 or more.
The CPLA also widely consulted with stakeholders – including critics – when it drafted its tough Code of Best Business Practices. Even some of the industry’s harshest critics agree the CPLA’s Code goes a long way to reigning in payday loan operators.
The CPLA has established good working relationships with several stakeholders, including Credit Counselors in every province.