Payday loan industry preparing for change
- PUBLICATION: Lethbridge Herald
- DATE: January 10 2010
Federal approval of the lending rate for Alberta’s payday loan industry could still be months away, but a new set of rules governing the industry have been in place since last fall.
Payday loans are like cash advances on one’s paycheque, unsecured and doled out without need for a credit check on the applicant. But high interest rates often entrap borrowers and lead to a cycle of temporary loans to pay off existing loans.
“The maximum cost of borrowing, 23 dollars per hundred, still has not been approved, but the rest became effective in September,” said Mike Berezowsky, assistant director of communications for Service Alberta.
“Basically they were completely unregulated, from our perspective provincially, so everything’s changed. They have to be licensed, and as a condition of that licence they have to post a security. Consumers have a two-day cooling-off period during which they can return the money, no questions asked, cancel the loan and they don’t have to pay any costs.
“We’ve prohibited rollover loans, where a new loan is extended to pay off the previous one. There’s also a practice called discounting, and that’s been prohibited as well. Discounting is where they’ll loan you one amount, say $300, but into that $300 they also put some of the fees. The problem with that is the consumer doesn’t necessarily know what the true cost of borrowing is.”
As well, the province has made it mandatory for payday loans stores to post information explaining the cost of borrowing, and contracts must be in plain language and include disclosure about borrowing costs.
Berezowsky said until federal approval of an interest rate capped at 23 per cent, payday loan firms can still set whatever rates they want.
Section 347 of the Criminal Code makes it a criminal offence to charge more than 60 per cent interest per year, but payday loan companies have always fallen into a grey area in the regulatory end of things. If the rate of interest on payday loan transactions was calculated according to the definitions and methods specified in the Criminal Code, some payday loan companies appear to be charging interest in excess of 1,200 per cent a year.
In 2007, Bill C-26 was introduced to exempt payday loans from criminal sanctions in order to facilitate provincial regulation of the industry. Many provinces have since established their own regulations.
“We heard from Albertans that they wanted to see some rules in place,”?Berezowsky said. “And we also heard from the industry, as well — they wanted more of a level playing field with clear rules. They didn’t want to operate in this sort of grey area.
“We did a lot of consultation with consumer groups, with industry, and we did some surveys with payday loans users themselves as well. The new regulations really reflect what we’ve heard from people.”
Borrowers should ensure the lender they visit is licensed, and they should ensure they understand the terms of the loan, the duration, and additional fees.
“These are unsecured loans, they’re high risk, so they are going to have a higher interest rate. You’re not putting up any collateral. There’s a cost with that risk, and consumers need to be aware of that.”