Wednesday, May 16, 2007

A Payday Loan Alternative in Canada: Micro-loans

By Paul Rizzo
Payday Loan Writer

They are popping up all across Hamilton. You pass half a dozen of them walking along King Street East between Wellington and James streets: storefront operations with flashy signs promoting “Instant Cash! Money Now! Cheque cashing!”

Believe it or not, payday loan outlets in this city outnumber McDonald’s, Wendy’s, Harvey’s and Burger King restaurant franchises combined.

These instant payday loans are supposed to be short-term loans for small amounts - for emergency or one-time situations. The stores promote quick cash without a credit check.

Payday Advance Loans According to Statistics Canada, the typical borrower is a person with lower employment income and limited or no savings to cover an unexpected expense. Borrowers often have few other options when they run into a financial problem — whether for a needed repair, higher than expected utility bills or a family emergency.

Loans are generally repayable at next paycheck.

To get a payday loan, an applicant needs to provide a post-dated check for the amount of the loan plus interest and any applicable service fees.

The problem is that because the loans cover such short time periods, when added up, the interest and service fees by far exceed the 60 per cent annual rate of interest allowed by the Criminal Code. In real terms it may mean paying $300 on payday to borrow $250 today — still a substantial amount.

Unfortunately, some borrowers are unable to repay the entire amount of the payday advance loan at their next paycheck. Some payday loan companies allow borrowers to renew the loan. It often leads to more interest and more fees - initiating a cycle of deepening debt.

Proponents of the payday loan/check cashing industry say they are filling an important consumer need - banks simply don’t offer small loan amounts. Some clients have bad credit and simply wouldn’t qualify for other financial assistance when they run into a “one-time” financial emergency.

Opponents call the personal cash loan industry predatory and their services a new type of usury.

Both groups acknowledge that the payday loan industry has been operating in a vacuum - without much oversight from government and without adequate protection for consumers.

That may be changing.

Stan Keyes, Hamilton West’s former longtime Member of Parliament, took many in the community by surprise when he accepted the position as president of the Canadian Payday Loan Association.

Keyes wants to change the image of the payday loan industry by pushing tougher regulations that would weed out the industry’s “black sheep” who “conduct bad business practices and charge excessive fees that bring disrepute on a legitimate business.”

Keyes recently moved the association’s national headquarters to downtown Hamilton - and is keen to promote consumer education for the two million Canadians who get quick cash loans each year, so that people can make “informed decisions about their money.”

The Payday Loan Association has adopted a code of conduct. The association’s 500 member companies do not allow rollovers, promote a cap on the amount of interest and fees that can be charged and they are also supposed to refer clients to credit counselling if they become repeat users of the service. The association makes use of an “integrity commissioner” to ostensibly keep the members honest and fine them when necessary.

But the Canadian Payday Loan Association only represents about 40 percent of the no fax payday loan outlets operating. Many other companies still seem to operate without internal moral compasses — charging even higher interest and allowing rollover of loans.

Some companies even actively solicit rollovers, calling borrowers a few days before loans are due asking them if they would like to renew their loan.

Into the breach comes government - only about 10 years too late.

Earlier this month, the federal government enacted legislation to allow provinces to regulate the payday loan industry.

Ontario has stepped forward with some very minimal regulations that will force cash advance payday loan outlets to post signs explaining interest rates, fees and additional costs that customers incur when taking out a loan.

Other provinces have gone much further in Ontario in capping rates.

This is an industry that needs a very tight reign. However, the proliferation of the industry is merely a symptom of a much larger problem.

According to the Association of Community Organizations for Reform Now (ACORN), the rise in the faxless payday advance outlets has corresponded with the closure and downsizing of bank branches from low income neighbourhoods. In the absence of those mainstream financial institutions, low-income residents are forced to go elsewhere, despite high fees and interest rates.

A very unscientific “Google Map” search of the Lansdale neighbourhood — one of Hamilton’s lowest income areas - reveals no chartered banks operating but several payday loan outlets up and running.

If the federal government required banks to make services more accessible to low-income consumers or if community micro-loans were more widely available, the payday loan industry would likely evaporate.

In the meantime, it is essential that policies be put in place to ensure rigid protection for consumers of the payday cash loan industry.

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