Ottawa, October 25, 2016 – Despite the negative image associated with its business, the payday loan industry provides a valuable service to a specific clientele of Canadians. In a new report, the Conference Board of Canada estimates that Canada’s approved payday lenders have provided Canadian households with close to 4.5 million short-term loans valued at $ 2.2 billion. Given these findings, improving the financial literacy of Canadians is key to helping them make the best financial decisions possible.
“The Canadian payday loan industry provides a vital service to cash-strapped Canadians who have trouble accessing other credit sources in times of crisis,” said Pedro Antunes, Deputy Chief Economist. “When thinking about toughening the regulatory requirements for the sector, policymakers need to consider the different categories of people who pay and pay attention to not restricting access to credit for a financially vulnerable segment of the population. “
- In 2014, Canada’s approved payday lenders gave Canadian households nearly 4.5 million short-term loans worth $ 2.2 billion.
- Two distinct categories of clients use payday loans, each with different reasons for doing so.
- If they can not access an authorized payday lender, clients may turn to unauthorized service providers or lenders offering their services illegally on the Internet.
- In addition to proper regulation of the payday lending sector, better consumer education would be a critical step in protecting the financial well-being of Canadians who use payday loans.
- The millions of short-term loans granted by the sector in 2014 alone generated 6,930 full-time equivalent jobs in the Canadian economy and $ 273 million in wages. If projected in 2016, the Canadian payday loan sector will provide nearly $ 6 billion in loans to households this year for $ 3 billion.
Payday loan users fall into two distinct categories, each with very different needs:
- People with limited assets, low incomes, and a job – they rely on payday loans to cover their unexpected recurring expenses and current needs. They can turn to payday lenders because they can not get consumer credit through conventional financial channels.
- People who have a lot of assets, but temporarily lack liquidity – they are economically more stable, and use the payday loan as a means of temporary financing to cover unexpected expenses.
Government policies regarding payday loans must take into account the needs of these two categories of clients. Provincial legislation governing the payday lending industry in Canada already provides important safeguards against the exploitation of clients. In addition, the payday loan fee limits are largely consistent with the payday loan sector’s cost structure in Canada.
Decision makers must be cautious when considering reducing maximum provincial fees. Given the costs borne by payday lenders due to the high rate of delinquency, the capping of fees could make this activity unprofitable if it is set too high. If clients can no longer access the services of an authorized payday lender, they may turn to unauthorized service providers or lenders offering their services illegally on the Internet.
Consumer education is a critical step in protecting the financial well-being of Canadians who use payday loans. It would help users recognize approved payday lenders on the Internet and avoid illegal lenders. In addition, improving financial literacy is essential to enable consumers to easily spot payday loan interest costs and make as sound financial decisions as possible.
The Filling the Gap report: Canada’s Payday Lenders was prepared by the Conference Board of Canada for the Canadian Consumer Finance Association.