Tuesday, May 8, 2007

The True Cost of Payday Loans

By Paul Rizzo
Payday Loan Writer

Here is a recent editorial from a Canadian newspaper:

Payday loans will soon be seen for what they are - a pitfall for vulnerable users -thanks to the Ontario government.

The Dalton McGuinty Liberals, empowered by recent federal legislation allowing the provinces to put some restraints on the payday loan industry, introduced measures last week to force lenders to disclose all fees and interest rates charged.

Payday advance lenders are now required to post a 61-by-76-centimetre sign inside their shops which clearly explains the interest rates, brokerage fees, check-cashing fees and additional costs incurred when a customer borrows $100.

Payday lenders, which first came on the scene in the early 1990s, have run with little governance up to now.

Payday Loan Costs Under the Criminal Code, it is illegal to charge annual interest rates of more than 60 per cent, but the law is not often enforced. And, according to news reports, some supposedly cheap payday loan lenders hide the high interest rates by saying fees above the legal maximum are “service charges.”

And, while Ontario is off to a good start, the province could take further steps to rein in such businesses by following the examples set by other provinces.

Manitoba and Nova Scotia have passed laws capping the interest rates and fees bad credit cash loan lenders can charge. New Brunswick, Saskatchewan, Alberta and British Columbia are in the process of enacting similar legislation.

In British Columbia, for instance, the province is conferring with consumer and industry organizations to establish reasonable fees for consumers, “but sufficient to cover the industry’s administration costs.” Fees will then be set by regulation.

The legislation will also prohibit lenders from requesting an assignment of wages, lending more than a regulated percentage of a borrower’s take-home pay, or requiring borrowers to sign documents transferring ownership of property, such as a vehicle.

These are all steps Ontario could and should implement to better protect the consumers who are at risk from no faxing payday loans - in most cases young, low-income families.

According to Statistics Canada, low-income families are twice as likely to use payday loans as the rest of the population, even though they are less likely to be able to afford the loans’ high fees and interest rates.

Cash advances have become part of a growing trend in Canada - mostly for low-income families or those with bad credit - offered by lenders other than banks or other regulated financial institutions. The loans are cash advances, usually $100 to $1,000 with repayment on or before the next payday.

According to an online calculator at www.moneymart.ca, a $200 loan would amass $36.81 worth of fees in two weeks. Money Mart’s annual rate of interest is 46.44 per cent, according to the company’s online loan agreement.

In Ontario, interest and fees on quick cash loans can soar to as much as 1,000 per cent, thus ensnaring susceptible users whose low incomes or poor credit ratings make them an unacceptable risk for banks.

With interest rates and fees offered by cash advance online lenders in Ontario, those who are forced to use such services are hard-pressed to get their debt under control and it ends up spiralling out of control.

In worst-case scenarios, such families could be forced to declare bankruptcy or be forced to access social assistance adding a further burden to the system. The province must do all it can to help low-income families avoid such financial pitfalls.

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