Changes to payday loan regulations in Canada are needed to protect both borrowers and society in general, according to a new report by Ottawa-based research organization Cardus.
These loans are big business in Canada, with more than 1,500 retail outlets lending over $2.5 billion per year, Cardus said. Taking fees and penalties into account, interest rates can range from 600% to over 900% per year.
A Vancity report released in January said in Vancouver alone, the value of these services was $385 million in 2014 – up 21% in two years.
These companies tend to set up shop in lower income neighbourhoods, making it easy for those who are economically disadvantaged to get stuck in the cycle of facing ballooning debt and being unable to pay back loans.It’s not just the borrowers who suffer, however, according the report.
“Payday loan companies thrive when their customers are desperate, and as a result, many of the costs associated with that desperation—increased health care costs, reliance on social services, family breakdown, policing costs—are socialized,” said Brian Djikema, who co-authored the report with Rhys McKendry.
Cardus said there are three ways the payday loans markets should be changed to prevent these problems.
First, the government’s focus should move away from interest rate caps and move toward a requirement for longer-term loans that can ultimately increase affordability for borrowers.
As well, Cardus said governments are not the only ones that need to enact reforms; banks, charities and credit unions should get involved by offering lower rate options to low-income earners.
Lastly, the think tank recommends the introduction of “social impact bonds” designed to provide incentives for companies that promote loans that help indebted borrowers.
@EmmaHampelBIV
