March 1, 2010 was a big day for pay day loans in Alberta as new legislation is now in place that governs how payday loans are provided, administered and what fees can be charged. These rules will drastically alter what type of fees these payday loan companies are allowed to charge. Similar rules are in force or pending in other provinces, including the Ontario Payday Loans Act of 2008.
For those of you unfamiliar with payday loans, they are a fairly young component of the Canadian financial market place. At their root they are short-term loans that are designed to give you some temporary cash between pay periods, kind of like a cash advance. Typically all that is required to obtain a payday loan is that you must prove you are employed, have regular income, a permanent address, an active bank account and are willing to directly authorize a withdrawal of the balance of the loan and any associated interest or penalties from your account at your next pay day. Unfortunately, the problems associated with these types of loans are significant, the biggest of which is the amount of fees and penalties that are associated with them.
For example many payday loan companies historically have included a set up fee, a broker fee, an administration fee, a processing fee, convenience charges, verification fees, early repayment fees, cheque-cashing fees, NSF fees, roll-over fees, and renewal charges. Of course you rarely run into all of these types of fees, but regularly you will see a combination of these items, and when they are factored in, it is not at all surprising that the payday loan is regularly one of the most expensive ways to borrow money. It is not uncommon for a person to borrow $400 today, and then be required to pay back $500 on their pay day at the end of next week. That’s $100 in charges on a $400 loan, or 25%. However, if that’s a two week loan, the annual interest rate would be over 600%. In the past, payday loan companies avoided the usury laws by not charging “interest”; they simply charged service charges and processing fees.
The good news is that these legislative amendments will limit the type of fees that can be charged and the associated amounts. Under the new laws the payday loan companies are now limited to only being able to charge $23 for every $100.00 on each two week loan. This is a drastic improvement from the $40 to $45 that many of these companies were charging, and brings Alberta companies in line with many of the other provinces (Ontario’s limit is $21, Manitoba’s is $17, and BC’s is $23).
Along with the new regulated limit, this legislation also implemented a two-day cooling off period which allows consumers to return loans within that time period without incurring costs. As well, the fees are now to be paid directly by the consumer and not taken from the loan itself. In addition, all costs of borrowing must be posted , and the use of “plain-language” contracts has been mandated.
While I don’t disagree that this is an improvement, my real question is whether or not these changes are enough? For example, if I walked into a payday loan company today and borrowed $1,500 for two weeks, I would pay $345.00. That’s for 2 weeks — almost double the cost of your typical credit card. And the scary part is that it is completely legal.
If that isn’t bad enough, the biggest problem with payday loans is that while they are intended to be temporary, a dependency often results. I regularly see people who were forced to get a payday loan to overcome a temporary hurdle, but at the end of the loan period were no better off and now are forced to take out another payday loan just to cover the first. The high cost and the easy approval leads too many people to be trapped by one of the most expensive forms of credit and this just isn’t right.
If you find yourself feeling trapped by payday loans, and if you are finding the cost of maintaining these loans is causing problems keeping up with your other bills, the best advice we can give is to discuss things with a qualified professional. There are many ways to deal with these types of situations and it is best to sit down with someone who can explain how a consolidation loan, debt management plan, or a consumer proposal can help you to put a stop to this revolving door of high interest. Whoever you see, make sure they discuss all of the available options and compare each to your own situation. This way you can make an informed decision as to which solution makes the most sense for you and your family.