Being poor is expensive; predatory lenders make matters worse
Being poor is expensive. Between overdraft fees, ATM fees and credit card interest, big banks and predatory lenders are taking advantage of low-income Canadians.
Recognizing that the pandemic is far from over and that its effects will remain lasting, advocacy organization the Association of Community Organizations for Reform Now (ACORN Canada) has produced a study detailing how high-cost loans ( such as payday loans, installment loans, and title loans) exploit low-income Canadians at a time of record inflation and great global economic uncertainty.
ACORN compiled a survey between November 2021 and January 2022, gaining insight into the harms and consequences of predatory lending from 440 people who have experience taking out high interest loans. One in four people said they were pushed into predatory lenders because of pandemic-related financial hardship.
The 52-page report, a combination of data and testimonials, found that more than two years into the COVID-19 pandemic, “many people are not seeing their financial situation improve.” An overwhelming majority of participants “expressed concern” about pandemic-related benefits like the Canada Recovery Benefit (CRP) ending or being more exclusive.
The report outlines the many ways lenders exploit customer vulnerabilities, ranging from incompletely explaining the cost of borrowing to “offering loans under the guise of improving credit ratings or attaching insurance to ready to extract more silver”. ACORN concludes that banks are failing the same people who need their services the most, noting that the majority of customers who rely on payday loans were initially rejected by banking institutions. Not only are low-income people often denied bank loans, but they are also charged excessive insufficient funds (NSF) fees, averaging $45. This is in addition to late fees and hidden fees from predatory lenders.
The report also documented a worrying trend: while payday loans remain the most common type of high-cost loan, “installment loans continue to see an increase with an almost equal proportion of people reporting having taken an temperament”.
Installment loans seem attractive to borrowers because payments are spread over a longer period, but ACORN’s report suggests these loans also cause long-term financial pain for people trying to make ends meet.
Less than half of respondents, or 40%, said they had used high-interest loans “once or twice”, while one in four had taken out ten or more loans.
“It reveals the exploitative nature of high-cost lenders, because the goal is not to help people but to ensure that the person who took out a loan is trapped in a vicious circle of debt,” says the report. “The reasons people are forced to take out these loans are to meet basic expenses like rent, groceries, car repairs, etc.”
Part of ACORN Canada’s recommendations would see a fair credit benefit created by provincial or federal governments to help those in financial emergency, providing an alternative to predatory payday loans. The organization also wants the interest rate on installment loans to drop from 60% to 30%. This includes all fees, charges and insurance.
In 2017, more than 6 million Canadians were paying off installment loans of up to $15,000 with interest rates as high as 59.9% (the federal cap is 60%).
One of the report’s case studies documented the experience of Donna Borden, who borrowed $10,000 from CitiFinancial in 2003 after being denied a consolidation loan by her bank.
“After 7 years, Donna had paid $25,000 in interest and still owed $10,000,” the report said. “She was misled into getting $2,600 of insurance on a $10,000 loan and then also paid interest on the insurance. The lender also repeatedly changed the terms of Donna’s loan without telling her and charged her a number of refinance fees.
In 2019, ACORN sent a written submission to the House of Commons ahead of this year’s budget. Among their three recommendations are providing a $10-a-month internet plan to low-income Canadians, modernizing the employment insurance system, and making banking safer by ending predatory lending.
That report noted that nearly one in two Canadian workers live paycheck to paycheque, with millions of workers “at an unforeseen expense” far from “spiraling debt”.
Earlier this month, Nova Scotia’s Utility and Review Board (UARB) reduced the maximum cost of borrowing for payday loans in the province from $19 to $17 per $100. This amount will drop further to $15 per $100 on January 1, 2024. The new regulations, which are due to come into effect on September 1, will also see the maximum interest rate charged on outstanding default balances reduced to 30%. That’s still more than five percent higher interest than the average credit card company.
“Despite numerous comment letters claiming that the payday loan industry would be “shut down” in Nova Scotia or that the maximum cost of borrowing would be significantly reduced, the Commission remains aware that the federal and provincial governments have put in place legislation allowing lenders to offer payday loans to the public,” reads the UARB report.