Payday Loans: Market Trends
Borrowing money in the form of a payday loan is expensive for consumers. The use of these short-term and high-cost loans has more than doubled in Canada recently to reach 4% of Canadian households Footnote 1. The Financial Consumer Agency of Canada (FCAC) has been responsible for raising awareness of the costs of payday loans and alternatives. FCAC conducted a nation-wide survey of 1,500 Canadians who used payday loans to learn about ways to educate consumers. This report presents the findings of the survey and the measures FCAC plans to take to promote consumer understanding:
1) payday loan costs,
2) skills and resources to reduce the need for loans payday,
3) the resources to repay a debt and exit the cycle of indebtedness.
The results of our survey reveal a number of avenues that will help inform the development and promotion of educational resources for consumers. Three findings are particularly useful in guiding FCAC’s interventions:
Many payday loan users were unaware of the high costs of payday loans compared to other solutions.
Less than half of those surveyed (43%) understood that a payday loan costs more than other available solutions. This suggests that many people do not have sufficient knowledge to make the most consistent borrowing decisions that are most likely to benefit their financial health.
One of the reasons that payday loan users ignore the relative costs could be that many of them are not currently using other alternatives. More than 60% of those surveyed said they did not have access to a Footnote 2 credit card compared to 13% of Canadians overall, and 88% said they did not have access to a line of credit. This can be caused by a combination of factors. If some borrowers do not know the solutions available in conventional financial institutions, others may not be eligible for more credit.
These findings confirm the need to increase consumer awareness of the costs and alternatives to payday loans. FCAC will promote educational resources for consumers to help them learn about other available solutions and understand their relative costs. FCAC will also continue to work with the provinces and territories to develop a coordinated, pan-Canadian approach to educating consumers on these issues.
Most payday loan users reported borrowing to cover the necessary expenses.
Overall, 45% of those surveyed indicated that they typically use payday loans to cover unexpected expenses, such as repairs to a motor vehicle, while 41% have used them for planned expenditures, such as pay utility bills. Compared to the general population, it was significantly more unlikely that respondents would have saved money. These findings illustrate the need for consumers to increase savings levels, if possible, to be able to cope with the unexpected, savings they can draw on when they are struggling to make ends meet. FCAC will develop and promote educational materials to help consumers understand the importance of maintaining an emergency fund. FCAC will also promote resources to help consumers seek professional advice when they need help repaying their debts.
The payday loan is not used only by low-income Canadians.
Our survey shows that while payday loans are mostly used by low- and middle-income earners (over half live in households with annual incomes below $ 55,000), many high-income Canadians also indicated to use these loans. Twenty percent of those surveyed reported household income above $ 80,000 Footnote 3, and 7% of people had incomes above $ 120,000. While FCAC’s resources will focus on consumers with low or moderate incomes, the Agency will also strive to ensure that consumers, regardless of their level of income, use these resources on their own. the cost of payday loans versus alternatives; the need to save for emergencies; and seeking professional advice when they need help choosing products and paying off debt.
3.1. The payday loan
A payday loan is a small, short-term cash loan (up to $ 1,500) offered by an unconventional financial service provider. This loan is intended to allow the borrower to fill a cash gap until his next payday, when the loan must normally be repaid in full.
Payday loan is an expensive loan solution. The cost of this type of loan is generally based on a defined amount per $ 100 borrowed, for example, $ 21 for every $ 100, representing an annual percentage rate (APR) of 546% Footnote 4. The maximum amount eligible in dollars varies depending on the province that regulates the payday loan. Borrowers who can not repay their loan in full and on time may be subject to additional fees, including penalties and insufficient funds charges.
Despite the very high costs, more Canadians are using payday loans. In 2014, 4% of Canadian adults reported that their household had used a payday loan over the previous year, representing an increase of 2% compared to 2009 otnote 5. According to the Canadian Payday Loan Association, almost two million Canadians use payday loans every year Footnote 6.
According to the Criminal Code, the imposition of annual interest charges in excess of 60% is a crime Footnote 7. However, the law provides an exception when the provinces decide to regulate payday loans. Most provinces have adopted consumer protection measures, including:
- limit renewals and competing loans;
- ensure the full and accurate disclosure of the terms of the contract;
- allow borrowers to cancel new loans without penalty within one business day;
- require the establishment of an independent complaints resolution mechanism;
- adopt acceptable collection practices.
Provincial governments continue to adapt their regulatory frameworks as the market evolves.
3.2. Methodology of the survey
In the spring of 2016, FCAC conducted a national survey of 1,500 borrowers using the payday loan Footnote 8. Those surveyed were 18 years of age or older and had used the payday loan over the previous three years. The survey, which included 63 questions, was conducted online in both official languages. The full methodological report is available from Library and Archives Canada Footnote 9.
Respondents were randomly selected from a large pool of Canadians who indicated their willingness to participate in online surveys. Although the results of these surveys can not be extended to all payday loan users, relevant conclusions can be drawn from this sample. Online surveys have become commonplace in Canada, and their conclusions have been shown to apply quite well to the general population Footnote 10. However, one of the disadvantages of asking a person to comment on their own behavior is that their answers may not be perfectly accurate.
4. Results of the study
Most borrowers in our sample were of working age.