Last week, one of our consumer proposal clients received an e-mail from a payday lender called Cash 4 You. The e-mail included a “Loan Modification” agreement, outlining an amended payment schedule by offering to defer payments.

Here is a snippet from the actual document with identifying information hidden:

Here is the problem: Our client is already in a consumer proposal, which means, this loan to Cash 4 You has already been included in their filing and therefore no longer needs to be dealt with outside of the proposal. You can tell by the deferred payment date offered (09/26/2019) in the agreement that this loan is outdated, even though this agreement was sent on May 22, 2020.

One of the many benefits of filing a consumer proposal is that it is legally binding for the debtor and all of their creditors. With few exceptions (support payments being one example) no unsecured creditor is excluded from the insolvency process, which must be fair to all parties. If you owe money to a payday lender at the time of filing a proposal, this debt is included in your proposal. During the proposal creditors are stayed from enforcing collection.  Once your proposal is finished, the debt is discharged and forgiven.

But, Cash 4 You sent this communication anyway and it was not the only instance. A few more of our proposal clients who once borrowed from Cash 4 You were sent a similar loan modification agreement.

We have been advising our clients to ignore loan modification emails from any payday lender, assuming the lender was notified of their consumer proposal or bankruptcy. Clients can contact their Trustee if they have any concerns and do not have to deal with the lender directly. 

Maybe I am being too harsh. Cash 4 You may have truly been ignorant of our client’s proposal status. It could also be that they did not run any filters through their email list to exclude individuals who did not owe. Whatever the case may be, the communication caused a lot of confusion and distress to our clients.

However, I have another objection where the lender cannot plead ignorance. But first, below are the rest of the terms of the loan modification agreement:

These terms are not surprising. Lenders often charge interest on the loan principal during a deferment period.

But I take great issue with the fact that none of the recipients of this loan modification provided their consent to it. Cash 4 You borrowers did not proactively email the company to ask for the deferral outlined in the document. This agreement was sent in a general email blast.

I would argue that this loan modification agreement is yet another example of the predatory nature of payday lenders. They make more money if borrowers defer a debt payment. And given the cash shortage their clients already face; they are likely to defer. With less of the loan principal paid down, and high interest accruing, Cash 4 You makes serious money, while taking advantage of their borrowers’ precarious income situations.

But they are honest. Predatory, but honest. They do not hide the higher cost of deferment from their clients. They state it right in the terms that the deferral period “will reduce the amount that is applied to reduce your principal balance on your next payment and potentially subsequent payment(s), which will impact your cost of borrowing (as set out above).”

What they hope for is that the borrower will not mind the offer and will not reach out to them in the 10 days they provide for questions. The key seller is that a deferral is offered at all in an exceptionally desperate time. In fact, payday lenders often tempt individuals with good customer service.

If a payday loan was not already a nightmare to repay, this deferral makes the repayment process that much more difficult for borrowers. And Cash 4 You knows this.

If you are struggling to repay payday loan debt, you don’t have to keep borrowing to make ends meet. You can stop the debt cycle by speaking to a Licensed Insolvency Trustee near you about options to achieve true debt relief and a fresh financial start. We now offer all services via email, phone, and video chat. Get a free, confidential consultation today.

The post Beware The Payday Loan Modification Trap appeared first on Hoyes, Michalos & Associates Inc..

If you have payday loans on top of credit card debts, student loans and other debt, or you carry multiple payday loans, a consumer proposal is usually the better solution for debt elimination.

Here is one actual client example to explain why.  We’ve hidden and changed the name of the client, and some details, for confidentiality.

Mary visited a credit counselling company in 2018, struggling under the weight of 11 different payday loans.  You may wonder how this happens?  It’s simple, really and not uncommon.  Like many others, Mary took out her first payday loan to have money to survive until the next payday. Unfortunately, that meant she was short again the following pay, which meant visiting a second payday lender to pay off the first and borrowing more to pay the rent. Carrying more than one payday loan is easy when you consider the number of online payday loan lenders like MOGO, Credit700.ca, and BC-Loans.com. These companies don’t report to your credit bureau so there is no registry to show you already have many loans outstanding. The cycle continued until Mary owed 11 different lenders almost $16,000.

She thought credit counselling would help her repay all this debt by consolidating it into one new simple payment, spreading the monthly payments over 60 months. She hoped this would break the cycle and allow her to get back on track financially. She signed up for a debt management plan.

The credit counselling agency Mary worked with built a repayment plan as follows:

Payment Schedule

Unfortunately, the debt management program created by her credit counsellor was unaffordable. A review of her finances reveals why credit counselling was a bad option for Mary to deal with all this payday loan debt.

1. The monthly payments were front end loaded making for high initial payments, more than she could afford.
2. In aggregate, credit counselling would still have required Mary to make payments totaling $15,897.71, including interest and counselling fees of $6,578.
3. The debt management plan excluded all of Mary’s other debts, so she still had to keep up with all those payments as well.

When Mary came to see us for payday loan help, we did a full debt assessment, reviewing all her debts to determine what she could afford to repay. A full assessment showed that she had $71,000 in unsecured debts, including:

Based on Mary’s situation, it was impossible for her to keep up with all these payments. Based on her monthly income and debts, Mary could offer her creditors a settlement proposal in the range of $420 per month for 60 months. This would be all the payments Mary would be required to pay against all her debts. In total she would repay $25,200, including all fees and costs to eliminate $71,000 in debts. You may notice that the monthly proposal payments would be significantly lower than those required in the first 18 months of her debt management plan, which only dealt with her payday loan debt.

If you have significant debts, including multiple payday loans, a consumer proposal is almost always the cheaper alternative. This is because a proposal allows you to make a deal for less than the full amount owing, while a debt management plan requires you to repay 100% of the debt plus fees.

In the end, based on her unique situation, Mary filed for bankruptcy. Her precarious income made keeping up with proposal payments difficult. Again, this was an option available to Mary because she talked with a Licensed Insolvency Trustee. Through a discussion of her situation, it was clear that bankruptcy was a better option than the debt management plan.

If you, like Mary, have complex debts, including payday loans, we encourage you to contact a Licensed Insolvency Trustee to review all your options to find the best plan for you financially.

The post Why Credit Counselling Doesn’t Help with Payday Loans appeared first on Hoyes, Michalos & Associates Inc..

You can discharge payday loans through bankruptcy

Payday loans are a short-term, unsecured loan available to those with poor credit or who need quick access to cash to pay a bill.  

Because they are an unsecured debt, payday loans are dischargeable under the Bankruptcy & Insolvency Act in Canada meaning payday loans can be eliminated when you file bankruptcy.

Most clients we help with payday loans carry other debt as well.  They often turn to payday loans as a way of keeping up with their existing debt payment.

Borrowing money through a payday lender when you have significant other debt typically only delays bankruptcy, it does not eliminate the need to do something to deal with the underlying debt.

Filing bankruptcy for payday loans has two big advantages:

• You eliminate payday loan debt and any other unsecured debt you have, and
• because you are no longer making debt payments, you have more of your pay left each pay period for personal living costs. This means you won’t have to rely on payday loans to balance your budget in the future.

If bankruptcy is the right solution for you, it is better to file early. This allows you to begin saving money and start the process of repairing your credit sooner so that eventually you will qualify for better credit options than high cost payday loans.

Filing a consumer proposal for payday loan debt

It is not true that those who use payday loans only have a low income. More than half the people we help with payday loan debt have income over the government set threshold requiring extra payments in their bankruptcy (called surplus income). 

A consumer proposal will also eliminate payday loan debt.  A consumer proposal may be a viable alternative to deal with payday loans if:

• You have at least $10,000 in total debts including payday loans, credit cards, bill payments and bank loans
• You have an income above the government set surplus income threshold
• You have other assets you wish to keep like equity in your home

A proposal is binding on all payday loan lenders if more than half of your creditors vote in favour of your proposal. If your only debts are payday loans it may be hard to get above 50% approval, so a bankruptcy may be necessary however in our experience most clients carry significant other debt on top of payday loans, so a proposal is a good option to consider.

Will credit counselling deal with payday loans?

In our experience credit counselling cannot eliminate large payday loan debt.

A debt management plan, which is the program offered by credit counselling agencies, is a voluntary program.  Payday lenders typically do not agree to participate because they are not willing to waive such high interest on their loans and they are not willing to take payment voluntarily over 4 to 5 years.

A consumer proposal is generally a better option than credit counselling if you have high payday loan debt, along with other debts, since it is binding on every payday lender whether they vote yes or no, if your proposal is approved.

Tips to ensure your payday loan debt is eliminated

By law, once you file a bankruptcy or consumer proposal, any debts owing at the time you file are included in your proceeding and will be eliminated once you are discharged.

You can stop making payments to your creditors once you file, including those to the payday loan company.  To ensure you receive the full benefit of this discharge we recommend:

• You change bank accounts before you file. This is particularly important if you have signed a voluntary wage assignment, agreed to an automatic pay withdrawal or provided post-dated cheques with the payday loan company. Changing bank accounts stops the payday lender from taking an automatic withdrawal claiming they were unaware of the bankruptcy. The automatic stay provided by bankruptcy law means that creditors are not legally allowed to collect payment after you file, however, it does take a couple days for them to process the bankruptcy documents they receive.
• Do not listen to requests for payment after you file. We have found that some payday lenders aggressively attempt to persuade clients to pay back the loan for moral reasons (after all, they say, you borrowed the money). However, you filed bankruptcy or made a proposal to eliminate your debt, so you should not agree to send them any funds after you file. You can simply remind them you filed bankruptcy and that it is against bankruptcy law to pay one creditor over other creditors included in your bankruptcy or proposal.
• And as always, complete your bankruptcy duties on time so you can obtain your discharge or certificate of completion as soon as possible.

Getting payday loan help

If, like many of our clients, you are using payday loans to keep up with other debt repayment, this is a cycle that is best broken by filing insolvency with a Licensed Insolvency Trustee. 

Bankruptcy will eliminate payday loan debt. Contact us today to talk with an experienced trustee about your payday loan debt relief options.

The post Can I File Bankruptcy for Payday Loans in Canada? appeared first on Hoyes, Michalos & Associates Inc..

Yet despite all the warnings and changes, payday loan use among our clients is on the rise. Why aren’t these changes working? Why are indebted Ontarians in fact taking out bigger and bigger loans from payday loan companies?  To answer these questions and discuss the unintended consequences of recent changes to the payday loan industry, I talk with my co-founder and fellow payday loan antagonist Ted Michalos.

In Ted’s view, it’s a chilling fact that 37% (updated) of our clients have payday loans when they file a bankruptcy or consumer proposal.

It’s three times what it used to be when we started the study.

In 2011, 1 out of 8 clients were using these loans and now, it’s 4 out of 10. Ted argues that this situation is especially problematic because indebted Ontarians aren’t using payday loans to pay for living expenses. They’re using them to make other debt payments.

If the reliance on these loans isn’t troubling enough, Ted highlights that people are also borrowing more too.

The average loan now is $1,311. So when we started doing this in 2011, it was $716. That’s a massive increase!

Unfortunately, high-cost borrowing won’t be out of the picture anytime soon. In fact, Ted explains how the Ontario government’s new law to drop the cost of borrowing payday loans has unintended consequences. The maximum allowable cost per $100 borrowed used to be $21. Since January 1, 2018, it’s been dropped to $15 per $100 borrowed.

Ted argues that reducing the cost to borrowing will result in people just borrowing more because they think they can afford to. On the surface, it looks cheaper.

In addition, this new legislation has encouraged payday lenders to look for more ways to make money. Since they no longer make as much per loan, they create new products.

They’re like any other business. You’ve got a basic product line and it’s doing very well for you and someone cuts into your profit margins, you’re going to find another way that you can sell similar products. The similar product that the payday loan companies are switching to are something called installment loans.

These installment loans can be taken out for several months, with interest rates restricted by law to a maximum of 60%.

The results from our bankruptcy study on payday loans, coupled with new lender tactics to generate more revenue don’t have either Ted or me particularly thrilled. But, if you find yourself having more debt than you can ever repay, it’s better to explore your options for getting payday loan relief now to avoid making endless payments towards an expensive loan.

For more insight into the unintended consequences of new legislation, including solutions to curbing payday loan debt, tune into today’s podcast or read the full transcript below.

Other Resources Mentioned in the Show

• Hamilton City Council Meeting – Feb 20, 2018
• Ontario Regulation 489/17, made under the Payday Loans Act, 2008 

FULL TRANSCRIPT – Show 182 Why Payday Loans Won’t Go Away

Doug H:            Every now and then I like to get my Hoyes Michalos co-founder and business partner, Ted Michalos, all riled up so I put a microphone in front of his face and say those words that always drive him crazy, those words are payday loans. That was the topic of the first ever edition of Debt Free in 30, episode number one, way back in September 2014. The title was Ted Michalos Rants about Payday Loans. And even today three and a half years and 182 episodes later, that show is still in the top five of all time downloads for this podcast.

Obviously payday loans are a popular discussion topic and everyone has an opinion but the reason I’m bringing Ted back today is to talk about some scary new statistics we’ve put together showing that the payday loan issue continues to get worse. And I also want to talk about the unintended consequences of driving down the cost of payday loans. So, Ted are you all ready to get all riled up?

Ted M:              I hate these guys.

Doug H:            I know you do. I know you do. So before we get to your opinions let’s start with some facts. We just released our sixth annual review of payday loan use amongst people who file a bankruptcy or consumer proposal with us. We’ll leave a link to the study in the show notes but Ted, what did we find? Give us some of the quick overview.

Ted M:              Probably the most chilling thing is now 31% of our clients, so one out of three, have got payday loans when they file some sort of insolvency with us. Worse than that, it’s two and a half times what it used to be when we started the study. So, the first time we did a payday loan analysis in 2011 it was one out of eight clients were using payday loans and now it’s one out of three.

Doug H:            Yeah it’s obviously getting worse. So we know that people use payday loans and that the payday loan industry will say well, it’s a necessary evil, people in need of emergency funds they can’t get a regular loan so why then is the use of payday loans by our clients such a bad thing?

Ted M:              Well, because they’re not using payday loans for living expenses. They’re using payday loans to make other debt payments. It’s not a one off emergency loan, it’s once you get into this cycle you have to keep doing it. They get in multiple loans from more than one lender and the debts are piling up. So, the average client who’s got payday loans now has $3,400 worth of payday loans in their total debt. They’ve got $30,000 of other debt so that’s 134% of their take home pay every month they owe in payday loans.

Doug H:            Yeah, so there’s no way you can actually pay that back.

Ted M:              It just doesn’t make any sense.

Doug H:            The math just doesn’t work. If my paycheque is $3,000 and my loans are more than that there’s no way I can pay it back on my next payday.

Ted M:              That’s right.

Doug H:            It’s just not possible. So, now you said that our clients don’t just have one payday loan, they have more than that.

Ted M:              Yeah, you know what’s interesting when we first started this study our clients that had payday loans, it was one out of eight and they had 3.2 loans each. It peaked at 3.5 loans each in 2014. So everyone who had a payday loan probably actually had three and a half of them. It’s dropped now to 3.2 which you would think would be a good news story but it’s not really because the number of loans is down but the average value of the loans is up.

Doug H:            They’re borrowing more.

Ted M:              That’s exactly right.

Doug H:            How much are they borrowing on a per loan basis?

Ted M:              So the average loan now is $1,095. So when we started doing this in 2011 it was $757. That’s a massive increase.

Doug H:            Wow, so more people have them and they’re bigger so it’s kind of, you know, two bad things happening.

Ted M:              Right.

Doug H:            So, to summarize what you said the use of payday loans among people already in debt is increasing, they owe more in payday loans than what they make in a month, a lot more and they’re taking out larger loans than they were before. So, now that last one is even more concerning. I mean we all know, we’ve talked about it here before, the government of Ontario has changed the laws and more changes are coming. So why aren’t they working, why aren’t less people visiting a payday loan store, you know, why is it more and why are they taking out larger loans? So, let’s delve into this a bit. So let’s look at how the industry and legislation is changing and let’s talk about the real life consequences for those changes.

So, let me throw some out here and you can give me your comments on it. The most obvious change that’s happened is the cost of borrowing so two years ago the maximum allowable cost per $100 borrowed was $21, that was up until 2017. Last year 2017 they dropped it to $18 and then now, so from January 1, 2018 onwards it’s $15 per $100 borrowed. Now we’ll talk about why we’re quoting this as $100 borrowed instead of interest rates when we get there, but it seems on the surface like a good change for borrowers, cost is going down. I used to only pay $21 now I only have to pay $15. Are you happy about this, Mr. Michalos?

Ted M:              So look folks anybody listening to this, $15 on a $100 loan in two weeks still works out to an annual interest rate of 390%.

Doug H:            So, what you’re saying is $15 I do that 26 times because I’m paying it back every two weeks, 15 times 26 is 390. So, okay that sounds like a pretty big number to me.

Ted M:              Well and so an average credit card today if you’re a reasonable customer is 18%. I mean the law says anything over 16% for anything other than a payday loan is usury yet payday loans are 390% and we’re supposed to be happy about that.

Doug H:            Well, they’ve got some special rules that –

Ted M:              They have some very special rules; I’d like to know how they got them.

Doug H:            Good lobbyist I would assume. Well, what they would say is hey, it’s only 15 bucks on a 100 that’s 15% so technically –

Ted M:              And that’s the way people think about it, so one of our concerns is always been that it’s not clear to anyone borrowing this money that they’re paying ridiculous interest rate.

But you started out this top of the show talking about unintended consequences. So the government has made it less expensive to borrow this money and so the unintended consequence of that is people are borrowing more money. If you’ve got so much aside to pay for interest and they’re going to charge you less interest then I guess you can borrow more.

Doug H:            Well and that’s exactly what happened in the mortgage market.

Ted M:              Exactly.

Doug H:            Mortgage interest rates have come down, obviously they’ve started to creep up now into 2018 but over many years they kept going down and so what did that do to the price of houses? Made them go way up, I can borrow more so I can borrow more, it’s a simple as that. Now there’s no doubt that the average loan size and the total amount borrowed keeps going up and I’m not going to say that corrolation proves causation, I mean I can’t necessarily draw a straight line from one to the other, there’s obviously a lot of other factors here but it’s not helping. Let’s talk about other unintended consequences then. So, if you lower the cost that a payday loan company can charge I assume then they’ve got to look elsewhere to make money?

Ted M:              Right, they’re like any other business. You’ve got a basic product line and it’s doing very well for you and someone cuts into your profit margins, you’re going to find another way that you can sell similar products. The similar product that the payday loan companies are switching to are something called installment loans, you see them on the internet all over the place. So they’re not payday loans anymore, these are loans that you take out for three months, four months, five months, six months. The interest rates are restricted by law to a maximum of 60% but what we found is that they’re charging bloody close to that maximum.

Doug H:            Yeah and I met with a client a couple of weeks ago who had a $15,000 loan from a payday loan company. So it wasn’t a payday loan, he didn’t have to pay it back on payday, but of course it was like you say the interest rate was ridiculous. He had no choice but to come in and see me.

Okay, so the Ontario government is looking to make even more changes designed to help the consumer when it comes to payday loans, so let’s look at these and you can give me your thoughts on perhaps some other unintended consequences. So, we talked about lowering the borrowing rate. Effective July 1, 2018 the maximum loan is going to become a thing.  Lenders will not be able to lend more than 50% of your previous month’s net income per loan.

Ted M:              Half your pay.

Doug H:            Half your pay, tell me your thoughts.

Ted M:              Alright, so let’s look at our typical insolvent client that has payday loans. Their take home pay is roughly $2,600 a month, so that means under these new rules any one individual loan could be a maximum of $1,300. We know that the average client has 3.2 of those loans so they could actually owe what does that work out $4,100 or thereabouts under the new rules, when currently they borrow $3,500.

Doug H:            Well we know that the average loan size right now is just under $1,100.

Ted M:              Yeah, $1,095, something like that.

Doug H:            Yeah. So, under the new rules okay, I guess I can borrow $1,200.

Ted M:              And I’m willing to predict that they will, that’s a pretty safe bet.

Doug H:            Well, yeah. So let’s think this through and I’ll ask my listeners to close their eyes and go on a journey with us here. You walk into the payday loan store and you say I need a loan. And so the person there, these places are very friendly, they’re way better that a bank. They’re brightly lit, they’re happy, there’s lots of people to serve you.

Ted M:              They’re open late hours. They’re really convenient to get money from.

Doug H:            Yeah, they’re fantastic. So I walk in there and I say I’d like a loan and so they say oh, do you have a paystub? Yeah, I’ve got my paystub. Oh, I see so you qualify to borrow $1,300. Okay, well then I guess I’ll borrow $1,300 as opposed to now where I go in and I say okay I need $1,100 they’re going to offer me – they’re going to start at the high number, why not? That’s how it’ll work. So, I think that’s a serious unintended consequence that’ll no doubt catch people.

So, another new rule, the extended payment plan rule. So beginning July, 2018  assuming these  laws come into effect and I believe they will, it’s already been passed by the legislature. These are just changed to regulations, they don’t need any laws to change. Lenders must give you the option of an extended payment plan if you take out three loans within a 63 day period.

Ted M:              I assume that means three loans with the same lender.

Doug H:            That’s what we assume.

Ted M:              But we never know, right?

Doug H:            It’s not specific in the regulations but how could it be anything other than that because of course they’re not aware of all our other loans at every other place.

Ted M:              Because they’re not reported anywhere, that’s a different topic.

Doug H:            Exactly, in most cases they’re not on your credit bureau. So if you are paid weekly, bi-weekly or semi-monthly the installments must be spread out over at least three pay periods. So that the maximum amount of each installment is well, obviously around 35% of the combined total of principle in interest. Now 63 days is the same as saying well, over two months, which is presumably where it comes from, July and August are 62 days so I guess 63 is more.

So walk me through the math on this. Because on the surface again this sounds like a great thing, the amount they can charge you is limited to $15 on $100 whether I pay it back over one week or six weeks so I’m getting a longer amount of time to pay back my loan. This sounds like a good idea, tell me where I’m missing the unintended consequences.

Ted M:              Alright, well I’m going to keep the math simple. Remember that we said the typical client that has payday loans, has 3.2 loans and they owe $3,500. And also their take home pay every month is $2,600. So let’s take that $3,500 and apply the $15 per 100 interest rate, adds another $500 to it so now they owe let’s call it $3,900. It’s a nice simple number.

Doug H:            Pretty close to 4 grand.

Ted M:              Three equal installments is what this new rule requires means they would be paying back $1,300 per installment. So we already said that their take home pay is $2,600 a month, half their take home pay is $1,300. Their equal installment is $1,300. So how is that viable for anybody?

Doug H:            Well, it sounds like it’s impossible and you just quoted the number on – yeah so I owe –

Ted M:              Yeah and I used round numbers, if you use precise numbers you actually end up paying – they have to pay more than they actually get in their paycheque. It’s just impossible.

Doug H:            Yeah, it’s impossible. So, I borrow $3,464 the cost of borrowing like you say just over $500, call it 520 so if you multiply that by –

Ted M:              You add that to the 34.

Doug H:            Yeah so I’m up to almost four grand so equal installments yeah that would be about $1,327 I guess if you wanted to use exact numbers. And so that’s bi-weekly so on a monthly basis you could either multiply it by two which is what you did or you could multiple it by 26 because there’s a couple of months where you’ve got to make extra payments divided by 12. That’s where you get to around $2,800, $2,900 and they only make $2,600.

Ted M:              It just doesn’t make any sense.

Doug H:            So, that would be an obvious unintended consequence then. We think we’re helping people but all we’re really doing is allowing them to borrow so much money that they can never pay it back.

Ted M:              Well, we can already predict what’s going to happen. If somebody is on this program they’re going to have to go to another payday lender to get enough money to actually live because their paycheque is going to pay the first guy.

Doug H:            Yep, you’re going to borrow more so you’re going to have to just keep cycling it around. So, okay now that everyone’s all depressed here.

Ted M:              I’m just mad. I’m not depressed.

Doug H:            I know and it’s very frustrating and, you know, you’ve kind of got to give the government the benefit of the doubt because okay on the surface these rules look like they are designed to help people making things, you know, more affordable, allowing them longer time periods to pay. But as we’ve shown there’s a bunch of unintended consequences too and it’s probably just going to drive people to borrow even more.

Ted M:              I think it makes it worse.

Doug H:            So, there’s one final change I want to talk about and then I want to start talking about solutions here. So, I mean I personally have said on this show many times that I think one of the solutions to society’s debt problems is education. I mean that’s not a full solution because as we’ve talked about on this show before a lot of people get into financial trouble because they have reduced incomes. They lost their job, they got sick, they got divorced and they started to use debt to survive so we’ve got an income problem not a debt problem.

We don’t have time to discuss that issue today but if we could solve the income problem we could help the debt problem. But beyond that as you already mentioned our clients, maybe we didn’t actually touch on this point but our clients who earn over $4,000 a month are more likely to have payday loans than our clients who earn between a thousand and two thousand dollars a month. So it’s not just an income problem, it’s more than that. I think it’s an education issue not knowing how crazily expensive payday loans are.

So here’s the final new rule, disclosure. Currently lenders are required to disclose and advertise the cost per $100 borrowed. Effective July 1, 2018 they must also disclose the equivalent annual interest rate on a $500 term loan for 14 days in both a poster and a flyer. Well, we’ve already done the math for them it’s 390%.

Ted M:              Right.

Doug H:            Now Ted, this is something you and I have lobbied for for many years, we included this in our submission to the provincial government back in May, 2016 so I guess you can I take credit, I’m sure they did exactly what we had recommended.

Ted M:              Well we know that they listen to these podcasts quite religiously.

Doug H:            It was probably the podcast that turned the tide here. I mean I’ll include a link to that in the show notes. I guess that’s good news, right? They’re actually going to do what we’ve asked them to do, disclose the effective annual interest rate?

Ted M:              So I’m going to say that it sounds like good news but the proof will be in the pudding. I’m going to need to see how they actually implement this before I can tell you whether or not it’s going to be effective.

Doug H:            Well so let’s wait till July and see what happens.

Ted M:              Which means you’re going to bring this up again in July.

Doug H:            We will, we’re going to talk about that. So okay I mean I’m willing to buy that. I think it’s a good start. I mean we’ve already said it our clients with payday loans almost $3,500 in payday loans but they also have almost $30,000 in other unsecured debt. So even if they could almost magically eliminate their payday loans, they’ve still got $30,000 in other debt.

So, one thing I’d like to see on those posters and flyers in the payday loans stores is a link to resources that could actually help people deal with their debt. Now I was invited to speak before the planning committee of Hamilton City Council on February 20. If I can get a copy of that recording I’ll put it in at the end of this episode. But what I recommended, and they were looking at changes to payday loan bi-laws, was that Hamilton change their bi-laws to require a link in those posters to page in the city of Hamilton website to other resources.

I would like to see Ontario do the same thing. I mean it would cost virtually nothing to have a link to a page like I don’t know, Ontario.ca/debt that could have a list of resources like licensed insolvency trustees who could actually help you eliminate your debt. It’s that other $30,000 in debt that’s the big problem. If I didn’t have that debt I wouldn’t be getting the payday loan, so, final word to you on that Ted.

Ted M:              Well, so this is going to sound like a commercial but if you’ve got more debt than you can deal with, the solution is not to incur even more debt at a more expensive level. So you go this $30,000 that our average client has and to make those payments you go out and you borrow payday loans to make the minimum payments and so now you owe $33,000 and you just can’t make the monthly payments. The solution isn’t to keep this cycle going, it’s to break the cycle, which means you need to talk to somebody with a professional knowledge and experience to solve your problem.

Doug H:            And I’m going to interrupt you there because I want you to further talk about that. But okay, in real life here my rent is due on the first of the month.

Ted M:              Yep, for most people.

Doug H:            I don’t get my paycheque this month till the third. So, I’ve got no choice but to get a payday loan. I mean all the education in the world isn’t going to change that simple fact.

Ted M:              Well, no I think you’re looking at it the wrong way, and I know you’re being facetious.

Doug H:            Yes, I’m throwing you questions.

Ted M:              You know that at the first of the month the rent is due every month. If you’re getting paid bi-weekly you know that twice a month you get a paycheque and one of those paycheques you have to set aside the money for the rent. And so the example you’re giving is somebody who isn’t able to set aside the money for the rent because they got all these other obligations that they’re trying to deal with. payday loans just make that worse.

Doug H:            And yeah if it was a case of a temporary interruption in income, I was off sick for a week because of the flu which everyone seems to have at the moment then the obvious answer is to go talk to your landlord and say look sorry, I’m not going to have the cheque for you on the first, it’s going to be on the third. It’s highly unlikely they’re going to evict you for being three days late. But you’re right, the real problem is I’ve got all this other debt I’m trying to keep all the balls in the air. So, our clients end up primarily when they have payday loans and other debts they’re looking at a consumer proposal.

Ted M:              That’s right.

Doug H:            How is that helping the situation and how does that work?

Ted M:              So for folks who aren’t familiar with what a consumer proposal is, it’s a plan whereby you repay a portion of what you owe. Interest is stopped immediately, you’re not paying back the debts in full in most cases because you’re only repaying what you can afford to repay. Typical example you pay back a third, but it varies for everybody that we talk to.

Doug H:            So in a case of the typical client we’ve got that’s got payday loans, they owe somewhere around 33, $34,000.

Ted M:              Probably they’re repaying somewhere around 11 to $12,000 depending on who it is that they owe in their financial situation but that would be –

Doug H:            That would be a typical number.

Ted M:              And that’s an average number.

Doug H:            So you’d be looking at maybe a couple of hundred bucks over a few years, something like that. And that would be all in that would include all of our fees, all the government fees, everything.

Ted M:              Well and think back to a second, the math we did earlier in the show, if that client had $3500 in payday loans it’s $520 a month of interest on the payday loans.

Doug H:            In interest, that’s not repaying the debt.

Ted M:              So you’re already – that money’s already gone and we’re telling you there’s a solution.

Doug H:            Well, if you’re paying your payday loans in three installments, because that’s going to be allowed now, right? So then the payments each month are going to be –

Ted M:              Your entire paycheque for three paycheques.

Doug H:            So, okay so a proposal is like a no brainer then.

Ted M:              It pretty much is. Now most people still haven’t heard of these things and they almost always say that they sound too good to be true. The alternative to a proposal though is a bankruptcy. A bankruptcy still scares the bejesus out of people. It’s a pride issue and I get it. No one wants to talk to someone about saying look, I just can’t deal with my debts. There are times when it’s the right answer too. Bankruptcy you’re saying look, I can’t pay back this $34,000 that I owe, I need relief. And that’s why the laws were put into place. Most of the people we talk to can do proposal instead but frankly we’re going to talk about both because you need to look at all your options don’t just listen to me.

Doug H:            Yeah and I think the proposal is such a good option when you have payday loans is you can only get a payday loan if you have income. It doesn’t have to be a job, the payday loans places will lend you if you’ve got a pension, which is another topic for another day.

Ted M:              Hard to sell them blood.

Doug H:            But if you’ve got income coming in they’re willing to give you a payday loan well the good news is if you’ve got income coming in you probably can do a consumer proposal as well.

Ted M:              At significantly lower costs of what we were talking about for this damn interest on the payday loans.

Doug H:            Yeah, if you’re looking at over $2,000 a month to be servicing your payday loans and other debt, you can do a proposal for a couple of hundred bucks a month it really is a low brainer.

Ted M:              It really is.

Doug H:            And do you feel sorry then for all the payday loan companies who aren’t going to get all their money when someone does a proposal.

Ted M:              Yes, I’m happy to send them all flowers when they die.

Doug H:            Yeah we’re here to do what’s best for all concerned but I’m certainly happy that we can help our clients with like you say a much better deal.

Ted M:              Well and we’re not trying to put the payday loan people out of business. Before they came along it used to be you’d see Guido on the shop floor and he’d give you a loan till next payday and you’d pay him an extra 20 or 50 bucks or whatever it was. The payday loans at least now they’re out in the daylight. The problem is people aren’t educated enough. As you said nobody realizes that it’s 390% interest on the loan.

Doug H:            Yeah and once you grasp that I think that forces you to look for other options.

Ted M:              Right.

Doug H:            $15 on 100 doesn’t sound like much, 390% does.

Ted M:              Right. So that same $100 then you’re going to pay $390 in interest on the $100 you borrowed if it takes you the year to pay it back.

Doug H:            It’s impossible. Well and that’s obviously why we’re not big fans of payday loans and obviously why we want people to explore other options to deal with their debt. So, thanks Ted.

As I said earlier, our goal is to educate the public, and advocate on behalf of the average person.

So, in that spirit, on February 20 I spoke before the Planning Committee at Hamilton City Council.  At that meeting Hamilton became the first municipality in Ontario to pass a suggested bylaw that will limit the number of payday loan stores in Hamilton.

Under the new bylaw, there can only be one payday loan store per ward, and there are 15 wards in Hamilton.  Existing stores will be grandfathered so there will be more than 15 for a while yet.

Is that a good idea?

Here’s the audio from my 5 minute presentation to the Planning Committee in Hamilton:

I start by referring to the previous speaker, Tom Cooper, of the Hamilton Roundtable for Poverty Reduction, who did a good job of detailing the financial impact of high interest loans on the people of Hamilton.

Thank you.

My name is Doug Hoyes, I am a CPA, what we used to call a chartered accountant, and a Licensed Insolvency Trustee, what we used to call a bankruptcy trustee.

My firm, Hoyes Michalos & Associates, is now in it’s 20^th year.  Our Hamilton office is on the Mountain, on Upper James, just by the Linc.

We’ve analyzed the numbers for our clients across Ontario, and we’ve found that almost one third of my clients, people who have so much debt that they have no choice but to file a consumer proposal or bankruptcy, owe almost $3,500 on not just one but over 3 payday loans when they file with us.

Payday loans are an issue, because under Ontario law, the maximum a payday lender can charge is $15 on every $100 borrowed, so if you borrow $100, and pay back $115 two weeks later, and do that all year long, you will end up paying $390 in interest.

That’s a 390% interest rate.

But of course, my clients aren’t just borrowing $100; they’re borrowing almost $3,500, so over the course of a year that means they are paying over $13,500 in interest on a $3,500 loan.

That’s horrific.

Imagine what it would be like to borrow $3,500, and pay over $1,100 in interest every month!

It’s impossible.

So, we can all agree that there’s an issue with payday loans.

If payday lenders charge such a high interest rate, why do people get payday loans?

As I said, my clients with payday loans owe on average almost $3,500 on payday loans, but they also have almost $30,000 owing on other unsecured debt, like credit cards.

Payday loans aren’t the problem.

Debt is the problem.

A payday loan is not the first loan my clients get.

It’s the last.

They only get a payday loan because they have maxed out on every other type of loan.

They can’t borrow anywhere else, so they get a payday loan.

So, what’s the solution?

Because there are a lot of payday loan stores in Hamilton, one option that this Committee is considering would be to limit the number of payday loan stores, to make it less convenient to get a payday loan.  Seems reasonable.

I know that the Hamilton Roundtable for Poverty Reduction has done a lot of work on this issue, so I will defer to their expertise on this solution.  My only words of warning would be that you don’t want to make the rules too restrictive, because people may just go online to get a loan, and you can’t easily regulate that.  Today’s Hamilton Spectator has a story of exactly that happening, where a number of people got scammed.  Online lenders don’t have to live in the community, so they are not accountable to anyone.

Payday loans are a symptom of the real problem, so the solution must address the real problem: debt.

Since the City of Hamilton doesn’t have the power to solve our national debt problem, I recommend that we do what we can to give more information to payday loan borrowers.

I agree with the Ontario government’s plan to require payday loan stores, by July 1, to both display a poster and provide everyone seeking a payday loan with a flyer that states that:

“Our Maximum Annualized Interest Rate on a Two Week Loan is 390%”.

Making it obvious that the equivalent annual interest rate is 390% may make people think twice about getting a loan.

But I think Hamilton can do more than that.

I recommend that on that poster and flyer you provide a link to a webpage on the city of Hamilton’s website, perhaps something like Hamilton.ca/debt, where you can provide an updated list of resources for people dealing with overwhelming debt.

That list could include not for profit credit counsellors, but should only include credit counsellors who have a physical office in Hamilton; you don’t want to be referring people to a call centre in another city or province.

But credit counselling isn’t enough if you have massive debt.

Most people who get a payday loan because they have massive debt can’t afford a credit counselling debt management plan where they pay back their debts in full.  It’s too expensive.

The City of Hamilton is contemplating more regulation of payday loan lenders, so if you are going to go down the regulation route, the list of resources must include links to the only professionals that are actually regulated and licensed by the federal government to provide legally binding debt relief, and that’s licensed insolvency trustees.

Again, that list should only include licensed insolvency trustees that are physically located in Hamilton.

Residents of Hamilton get payday loans because they can’t borrow anywhere else. They have too much debt. So in addition to bylaw restrictions on store locations, let’s give them access to resources to deal with their debt, so we can work towards solving the real problem.

That was my presentation before the Planning Committee at Hamilton City Council on February 20, 2018.

As I said, I believe we need to focus not simply on restricting access to payday loans, but also on helping reduce the demand for payday loans by giving people the resources to deal with their debt, and that’s why I think consumer proposals are part of the solution to the payday loan problem.

That’s our show for today.

Full show notes, including a full transcript and links to everything we talked about today can be found at hoyes.com, that’s hoyes.com.

Thanks for listening.

Until next week, I’m Doug Hoyes, that was Debt Free in 30.

The post Why Payday Loans Won’t Go Away appeared first on Hoyes, Michalos & Associates Inc..

KITCHENER, ONTARIO, February 12, 2018 – Payday loan use among heavily indebted Ontarians continues to escalate, as research conducted by Licensed Insolvency Trustee firm Hoyes, Michalos & Associates Inc. reveals that 3 in 10 (31%) insolvencies in Ontario in 2017 involve payday loans, up from 27% in 2016.

“This is the sixth consecutive year-over-year increase since Hoyes Michalos began to study the impact of payday loans on consumer insolvencies in Ontario” says Ted Michalos. “Insolvent borrowers are now 2.6 times more likely to have at least one payday loan outstanding when they file a bankruptcy or consumer proposal than in 2011. This is a cycle that is just not sustainable.”

Insolvent debtors are taking out fewer, but larger loans according to the updated research. The average number of payday loans outstanding at the time of insolvency declined to 3.2 in 2017, after peaking at 3.5 loans in 2014. However, the average payday loan size in 2017 is $1,095, an increase of 12.4% from $974 in 2016.  One in ten (9%) loans are $2,500 or more, up from 6% in 2016.

“We see clients using larger and longer-term payday style loans more than ever before” adds Doug Hoyes. “The problem is high-cost, longer term loans do not help someone who carries an average unsecured debt load of $33,461.  In fact, it makes their situation much worse.”

The average insolvent payday loan borrower owes $3,464 in payday loans, or $1.34 for every dollar of monthly take-home pay, on top of $29,997 in other unsecured debts. They are using payday loans to keep up with existing debt repayment.

“Most clients tell us they know payday loans are an expensive borrowing option, however they turn to payday loan companies to keep all their other debt payments current for as long as they can” says Doug Hoyes. “For someone dealing with significant unsecured debt, they need a more robust debt solution. The earlier they speak to a professional like a Licensed Insolvency Trustee, the more options they have available to get those debts under control.”

The post Payday Loan Use Among Heavily Indebted Borrowers on the Rise appeared first on Hoyes, Michalos & Associates Inc..

Payday Loan Use Increasing

Let’s talk payday loans for a bit. As anyone who has followed my blog posts, or listened to my rant on Debt Free in 30, knows I have a particular hatred for these types of credit products. Our recent Joe Debtor study proves that I have good reason.

Source: Hoyes, Michalos

If you are using payday loans there is an increased risk that you will need to file for insolvency.

Our study showed that payday loan use among our clients is on the rise.

They owed on average $5,174 in total payday loan debt, or 195% of their monthly take-home pay. So how did they end up borrowing more than their pay in payday loans?  On average, a payday loan debtor actually had 3.9 payday loans. The average loan size being taken out was $1,311 and this too is increasing.

Source: Hoyes, Michalos

How is someone able to borrow from that many payday loan companies? Simple – no credit checks. If payday lenders don’t register the loan, you can easily walk into another lender to borrow a second, third or yes, 23^rd loan.

Payday Lenders Targeting Seniors

What bothers me even more is that more seniors are borrowing against their pension income. Payday loan companies specifically advertise that they will loan against CPP, ODSP, retirement benefits, pensions – you name it, they list it.

Today 21% of all seniors filing insolvency have a payday loan.

Payday loans are a scourge to the average debtor, and seniors are no exception. Seniors have an honest desire to pay off their debt and will do anything to try to make that happen. Most end up using payday loans to meet an immediate, necessary expense, or pay a bill, because debt payments have used up most of their income.  Once the payday loan comes due, the crisis is not over. Debt payments remain and in fact, are now even higher than before. This creates a cycle of borrowing that leads to the average senior taking out almost over three payday loans before finally admitting they need a better solution, which often means restructuring their finances by filing insolvency.

For more information on our study findings contact:

Douglas Hoyes, CPA, Licensed Insolvency Trustee
Ted Michalos, CPA, Licensed Insolvency Trustee

1-866-747-0660

The post Seniors Turning To Payday Loans A Scary Trend appeared first on Hoyes, Michalos & Associates Inc..

In this same study, 20% of Ontarians between the ages of 18 and 34 said they would definitely/likely apply for a payday loan in the next twelve months.  In contrast, 14% of Ontarians 35-54 would definitely/likely apply for a payday loan in the coming year and only 4% of those 55 and older stated they would do so.

It’s not surprising that young people are more likely to admit they use, or will use, payday loans. Just starting out, or possibly still in school, millennials tend to earn less and have lower credit limits. That means that payday loans are often their only source of quick money when other sources of credit run out.  In fact, 14% of payday loan users (those who used a payday loan in the last 12 months) aged 18-34 said they sought a payday loan because they were denied credit at a bank and 41% agreed that payday loans were their only source for borrowing money.

The Insolvent Millennial Debtor

In our original Harris Poll, 39% of millennial payday loan users (those 18-34 in 2016) said they sought a payday loan because of the amount of debt they carried.  We could interpret this to mean that 4 in 10 young payday loan users use payday loans because they already have too much debt.

Sadly, the result of borrowing debt on top of debt is usually insolvency.

Our Joe Debtor payday loan study found that 46% of insolvent millennials (those 22-17 in 2018)  had at least one payday loan outstanding at the time of their insolvency.  They in fact owed, on average, $4,792 on 4.1 payday loans.  Insolvent millennial debtors were the most likely of any age group to have a payday loan. (NOTE: These numbers have been updated for our 2018 Joe Debtor study.)

Not Worried Yet? Check The Trend

How about if we told you that the percentage of young debtors with a payday loan has been increasing dramatically?  The percentage of millennial debtors with a payday loan was only 16% in 2011; this increased to 32% in 2015 and now 46% in 2018.  Millennials are also making up a higher percentage on insolvent debtors overall – 37% in 2018 up from 35% in 2017.  While student debt is also an issue for millennials, their increased use of payday loans is making their financial situation much worse.

One last concerning statistic from our original study on payday loan use in Ontario: 60% of payday loan users between the ages of 18 and 34 would definitely/probably recommend a payday loan to family, friends or co-workers.

That is a staggering statistic, especially when they’re effectively recommending that someone take on a loan with an annual interest rate of 390%. So there you have it. Social proof that may mean we need to better educate young people about the longer-term risks of using payday loans.

The post Millennials Heavy Payday Loan Users and It’s Costing Them Bigtime appeared first on Hoyes, Michalos & Associates Inc..

Our data points to four startling findings (UPDATED for 2018):

1. 2 in 5 insolvent debtors had at least one payday loan at the time they filed a bankruptcy or consumer proposal.
2. The average insolvent payday loan borrower has 3.9 payday loans with total outstanding balances of $5,174.
3. Payday loans make up 14% of borrower’s total unsecured debt of $35,828
4. An insolvent debtor with payday loans owes 113% of their MONTHLY take home pay in payday loans.

Payday Loan Cycle All Too Common

When we’re pushing out statistics like that, not getting a payday loan seems like a no brainer. The fact is that people turn to payday loans because it’s the last type of debt they can get. They already carry a high amount of credit card debt, bank loans, and other unsecured debt and they need to keep up with the minimum monthly payments on this debt. At some point they can no longer pay for the groceries on their credit card because it’s maxed out. They may have a car payment coming due, rent, or need to buy groceries.  So they turn to payday loans.

People have payday loans because they have exhausted all other options.

Here’s the problem.  Once this cycle begins, they run out next pay. So they visit two payday loans stores and so on.  Eventually the average insolvent payday loan borrower owes more than $5,000 in payday loans.  While $5,000 doesn’t sound like a lot, it does when you are talking payday loan rates of $15 per $100 and 30% to 60% on payday loan style installment loans.

Hoyes Michalos issues our payday loan study each year in February. We spark a lot of discussions online which is good.

If you are a payday loan borrower, consider these alternatives to payday loans.

If you are already dealing with debt, a payday loan isn’t going to solve the problem. We suggest talking with a Licensed Insolvency Trustee about options to eliminate payday loan debt. Becoming debt-free should be your goal so you have money left at the end of your pay period without having to rely on payday loans.

Resources mentioned in today’s show: 

• Show #53 Clamping Down on Payday Loans & Regulating Alternative Lenders
• Show #83 Creating a Better Payday Loan Industry
• Show #85 Bill 156 – Is This The Payday Loan Regulation We Need?
• Show #92 Payday Loans Not The Real Problem: Consumer Debt Is
• Show #99 How to Fix the Payday Loan Industry
• Government of Ontario Payday Loans Act, 2008
• Bill 156 Alternative Financial Services Statute Law Amendment Act, 2016
• Our recommendations to the Standing Committee on Social Policy

FULL TRANSCRIPT show #130 with Ted Michalos

Doug Hoyes: Well, this show should get us into lots of trouble because once again we’re going to talk about what the government is doing, or not doing, about the crisis in payday loans. I’m joined by a guy who hates payday loans, my Hoyes Michalos co-founder and partner, Ted Michalos, you ready to go?

Ted Michalos: Sure, I hate payday loans.

Doug Hoyes: I know. So, well before we get started some trivia for our listeners: The first ever edition of Debt Free in 30 was titled “Ted Michalos Rants About Payday Loans”. That was episode number one back in September of 2014 and here we are obviously in 2017. This is episode number 130.

So, 130 episodes later and we’re still talking about payday loans. Out of our 129 previous episodes, that episode, episode number one where you ranted about payday loans is our third most downloaded podcast of all time. And the only two podcasts that had more downloads was a podcast on the smart ways to pay off debt, which of course is kind of the whole theme of this show. And the most downloaded podcast is the one I did with Gail Vax-Oxlade where we talked about whether or not reality TV is real. So, that tells me that payday loans are a big and important topic, or people just like hearing Ted rant, one or the other. So, you’re going to get both on today’s show.

Ted Michalos: Congratulations.

Doug Hoyes: So, let’s start with some of the background. In 2008 the government of Ontario introduced the payday loans act to regulate payday loan lenders. Before that the only real regulation was the Criminal Code of Canada, which of course was federal legislation.

In 2016 the Ontario government introduced Bill 156, the alternative financial services statute law amendment act because they like simple titles, where they proposed various changes to the payday loans act, including limits on how many payday loans you could get in a certain period of time, obviously to prevent multiple repeat payday loans. The bill made it second reading but then it died because parliament ended and they started a new one.

So, in August of 2016 the Ontario government announced that they were amending the regulations to the payday loans act, which of course doesn’t require any new legislation, to reduce the maximum total cost of borrowing a payday loan. So, Ted walk us through what the rules were and what they are now.

Ted Michalos: So, the rules used to be that it was $21 on 100 and the rules now are $18 on 100. So, that’s a positive thing that makes sense, it reduced it. But what people fail to understand is they confuse that $18 on 100 with 18% interest and that’s just not the case. It’s 18% interest every two weeks.

Doug Hoyes: Yeah and we’re going to do some more detailed math as we get into it. And so, $18 on 100 is the rule now. And then starting next year January 1st, 2018 it goes down to $15 on 100. So, on November 3rd, 2016 the Government of Ontario introduced a new thing, the Bill 59, The Putting Consumers First Act. This is a catch all bill that proposes changes to a diverse bunch of legislation including acts that deal with home inspections and financial services and consumer protection.

The Bill 59 contained some of the provisions that were not enacted in the old Bill 156, so they kind of copied from the old one to put it into the new one. So, for example under the new act, which is not yet law, a payday loan lender can’t operate at an office location if a municipality passes a bylaw prohibiting it.

Ted Michalos: Right. So, if the town or city you live in says no, we can’t have a payday loan lender in that location, they have to move to someplace else.

Doug Hoyes: Which, I don’t know if you need a provincial law for that. because if the municipal law says you can’t do it then I don’t know why you need a law. But okay, fine whatever, got to have laws I guess. The bigger one is that a payday lender cannot give a new payday loan unless at least seven days has passed since the borrower paid the full outstanding balance on their last loan.

Ted Michalos: Now that doesn’t mean you can’t go to a second lender, right?

Doug Hoyes: And that’s the problem with the law. So, it’s great you can’t kite from one to another but you go to another one. So, you know, whether these new laws are going to mean anything or not who knows. So, Bill 59 was carried on second reading of November 30th and then it was referred to the standing committee on social policy for further review. And that committee has hearings scheduled on February 21st, well that’s already happened, 27th and 28th, 2017. Now Ted and I asked to appear before the committee.

Ted Michalos: Very politely.

Doug Hoyes: Very politely. We sent a really nice letter. But they said yeah, no sorry, we don’t want to hear from you guys. So, why did we want to go before the committee and what would we have said? Well, let’s find out. So, Ted let’s start with the very, very basics here. Payday loans, what exactly is the biggest problem with them?

Ted Michalos: The biggest problem is the cost. So, I mentioned the interest rates earlier, let’s do a specific example. From our study of what our clients have borrowed from payday loans, the average person has about $3,000 worth of payday debt when they have to come and file either a bankruptcy or consumer proposal. Now $3,000 may not sound like a lot of money relative to all the other debt that they owe, but remember this is debt that you’ve got to pay the fees on every two weeks. So, that $3,000 two weeks later you’re paying $540 in interest expenses. That’s $18 on 100 and you’ve got 30 hundreds. Two weeks after this you pay another $540. Over the course of the year that’s $14,000 in interest in $3,000 worth of debt.

Doug Hoyes: This is a big problem and that’s why obviously we’re not big fans of payday loans. So, we didn’t get called as witnesses at Queen’s Park but if we did get called those are the kind of things that we would have said. We would have said, you know, despite all of our warnings about the high cost of payday loans, heavily indebted consumers are still using payday loans and in fact they’re using them more than ever before.

So, how do we know this? Well, Ted already alluded to it. Every two years we release what’s called our Joe Debtor Study. We take all of the data from all of our clients and we analyze it and we come up with the profile of what someone who goes bankrupt or files a consumer proposal looks like. Now we’re going to releasing the full study at the beginning of April. We’re releasing all the number crunching on it. But today because of these hearings that are going on at Queen’s Park, we’re going to give all of our listeners a sneak peak of the data from that study. And I’ll even give you a web link here you can see it all, it’s joedebtor.ca/paydayloans.

So, here it goes. We had four key findings that we’re going to be mentioning and obviously releasing in the full study. So, finding number one, 1 in 4, so 25% of our clients, insolvent people, had a payday loan, which was up from 18% in 2015. Let me give you two more and then I’m going to bring Ted in to comment on this. Of our clients that have payday loans, Joe Debtor, as we call our average client, has on average 3.4 payday loans with total balances outstanding of $2,997. That’s about the three grand that Ted was just talking about. That’s up 9% from the $2,749 it was when we did the study two years ago and released it in 2015.

Number three key finding payday loans make up 9% of payday loan borrower’s total unsecured debt of $34,255. So, okay that’s a whole bunch of numbers let’s not be confusing everybody here, let’s get to the gist of it. So, Ted, $3,000 in payday loans doesn’t sound like that much, particularly when as a percentage my total debt’s $34,000 so okay $3,000 is less than 10% of my total debt. What’s the problem? Is it as simple as what you just said that the interest is massively high?

Ted Michalos: Well, one of the problems with averages is they hide some of the underlying facts. So, one of the things our study found was that the youngest decile of people, 18 to 29 year olds have the most payday loans. The total amount that they borrowed is lower but it’s more than 10% of their debt. The every age bracket, the percentage of the payday loans compared to their debt is lower but the total amount that they borrowed is higher. The highest borrowers are the seniors. Again, the part of this that is most disturbing is the trend. So, two years ago it was less than one in five of our clients had payday loans, now it’s one in four. That’s a 38% increase, that’s absolutely astounding.

Doug Hoyes: Yeah and I think it really debunks the myth. because when you talk to people on the street they go, oh yeah payday loans, those are people who don’t have jobs, they can’t get any credit, that’s why they get payday loans.

Ted Michalos: None of that’s true.

Doug Hoyes: No, it’s just not the case. I mean people have payday loans because they have exhausted all other options.

Ted Michalos: Right.

Doug Hoyes: It’s the last type of debt they can get. And we know that to be a fact because they’ve got $34,000 in unsecured debt. They’ve already got credit cards, bank loans, other forms of debt. And I have no other options. And we’re going to talk about what some of the other options are. That’s why they’re turning to payday loans.

Ted Michalos: Yeah, the fourth of our key findings is probably the one that’s most illuminating of this problem. So, Joe Debtor, our average client owes 121% of their take home pay in payday loans. So, that means for every dollar of take home pay that they have, they owe $1.21 in payday debt.

Doug Hoyes: Yeah, they owe more in payday loans than they make in a month.

Ted Michalos: How’s that possible? How can you ever repay it?

Doug Hoyes: It’s a massive problem and you’re right, how can you ever repay it? Well, we got a few other supplemental findings that I want to get your thoughts on. So, 68% of payday loan borrowers have income over $2,000 and those earning over $4,000 had the most loans, 3.8 on average. So, that’s what you’re saying, with each age group we go up it gets worse and worse.

Ted Michalos: Right and the more money you make the more you’re able to borrow on payday loans and so consequently the more you do borrow. Once you get on to this treadmill there’s no getting off.

Doug Hoyes: Middle and upper income earners are more likely to use payday loans to access. They can borrow more so they do.

Ted Michalos: Right, paycheque is higher so they’ll let you take out more money.

Doug Hoyes: They’ll let you borrow more. Now you hit on the age groups, 38% of debtors, age 18 to 29. So, I guess we’re talking like millennials. They use payday loans and on average they owe $2,292, so just under $2,300.

Ted Michalos: That’s more than one in three.

Doug Hoyes: That’s a huge number, 11% of seniors. So, we define seniors as anybody 60 years and older.

Ted Michalos: Thank you I’m not there, I’m close but I’m not there.

Doug Hoyes: Just so we’ve got a clean cut off. 11% of people 60 years of age and older have payday loans and on average if you’re a senior and have a payday loan, you owe $3,593.

Ted Michalos: Folks, these are people getting payday loans based on their pensions. I mean there’s no chance of them going out and getting some overtime or an extra shift, their income is fixed, $3,600 a month.

Doug Hoyes: Yeah and we’ve talked about this in the past. Why is a senior getting a payday loan? Well, number one because they can but number, you hit the nail on the head, two they have a fixed income.

Ted Michalos: Well and the psychology here is astounding. The seniors are the ones that feel the most guilty about not making their other debt payments. So, they’re going to go find a money wherever they can to make sure they keep their payments up to date because that credit ratings really important and I’ve got a debt, I’ve got to pay it. And so they incur these payday loans, which are absolutely insane.

Doug Hoyes: Well, and maybe it’s a stereotype but seniors in general are good people. I mean they’ve been reliable their whole lives, like you say they pay their debts. In a lot of cases they are parents, they have adult children now. I mean if you’re 60 years old your kids are probably grown or close to it and you’ve always helped them out, you want to keep helping them out, particularly in this economy, jobs are tough, people are getting separated and divorced, you want to help them out.

Ted Michalos: And now you’re helping your parents too.

Doug Hoyes: And your older parents, that’s even possible too because if you’re 60 years old you could still have an 85 year old parent still alive. How do you help everyone if you don’t have the money? Well, you go out and borrow.

Ted Michalos: And how can anybody think that having $3,600 in payday loans is going to solve your problems? I mean it just makes it so much worse.

Doug Hoyes: Yeah and it just can’t is unfortunately the problem. So, when we did our Harris poll back in 2016 we discovered that 60% of Ontarians, aged 18 to 34, so again we’re talking kind of in that millennial age group, reported that they would definitely or probably recommend payday loans to family, friends and coworkers. I mean that again is just absolutely astounding. So, Ted do you have any theories on why the average payday loan size is increasing?

Ted Michalos: Well, primarily it’s because the need has increased. So, the payday loan fellows will extend to you as much credit as they think you can repay. And they don’t take into account your other debts, or your other obligations. It’s if your pay is high enough they’ll give you enough money. And people unfortunately need to borrow more now because total debt loads are increasing.

Doug Hoyes: Well and what’s becoming insidious as well is that the payday loan companies are offering different products.

Ted Michalos: Yes, that’s true.

Doug Hoyes: So it’s not just okay we have a payday loan, the maximum is $500, that’s all you can get. No, no now we’ve got short-term loans and –

Ted Michalos: So this is great so I’ve sold you the payday loans but to help, at 460% interest, but to help you out I’m going to put you into a longer term installment loan. That’s only at 60% interest. I’m such a nice guy.

Doug Hoyes: Well and that kind of leads into our next topic, which is our recommendations. So, we’ve obviously studied this a great deal and what I’m going to do is put in the show notes, a list of all of the podcasts that we have done on this topic. Obviously we started with number one but we’ve been, we’ve done a number of them. I’ve had a number of guests on. I mean you can look for show number one, 53, 83, 85, 92, 99, those are all payday loan themed shows.

So, we’ve done a lot of research on it and we’ve looked at all the different possibilities for how to fix this problem. We looked at three different recommendations that we eventually decided, yeah, you know what they’re good ideas but not good enough that we can recommend them. So, I want to throw out what we didn’t recommend before we talk about what we did.

So, three changes that we thought of and have been recommended by others, number one limiting loan sizes based on income. So, loans could be limited to a fixed percentage of the next paycheque. So, for example if my next paycheque’s going to be $1,000 you could say hey, the maximum you could lend is half of that, $500. And in fact in Saskatchewan, the limit is 50% of the next paycheque. So, is that a good idea? Well, obviously we didn’t think it was a good idea, what’s the downside?

Ted Michalos: So, intuitively you think that makes sense. If you limit it to how much of their payday they’ve got coming, then how much trouble can they get into? But unless you also limit the number of outlets they can go to, it doesn’t make any difference. If I can only borrow $300 from the cash store that’s on the corner, then I’m going to go to the Money Mart that’s two blocks down and borrow 300 more if I needed 600 in the first place. So, it gives the appearance of solving the problem but it doesn’t really unless you also restrict the number of locations and loans that they can take out at one time.

Doug Hoyes: Well and you’re not giving a theoretical argument.

Ted Michalos: No, that’s the reality.

Doug Hoyes: That’s the reality. Our study shows that the average person who has a payday loan has –

Ted Michalos: 3.4 of them.

Doug Hoyes: 3.4 of them. So, if you have one, you’re likely going to have three. And again, as you said earlier those are averages. We’ve had clients who’ve had a lot more than three.

Ted Michalos: So, 10 years ago we wouldn’t have seen this. We saw a payday loan once maybe every 100 clients. Now we actually see folks who come and see us and file a bankruptcy or proposal because of their payday loan debt. So, they could have 12, 13, 14, 15 of these things. The total might be 12 to $15,000 but I mean it’s impossible. They’re making $2,000 a month, they owe $15,000 in payday loans, they can’t even make the $18 interest payments every two weeks.

Doug Hoyes: And the reason they have so many is there are so many of these outlets now. It’s not just the store on the corner of the street, there’s now tons of online lenders.

Ted Michalos: Yeah, the online stuff just drives us crazy.

Doug Hoyes: And so you can – literally there are 15 or 20 different people you can borrow from and that’s what people are doing. So, okay our first recommendation we decided not to recommend was limiting loan sizes just because all that does is induce you to go to different lenders.

The second thing we looked at but decided against was a limit on the number of short term loans a borrower can obtain in a fixed period of time. So, as I said at the outset Bill 59 sort of has this in it in that you can’t get a new loan until seven days after you’ve paid off the last one. Again, sounds good in theory, what do you see as the practical problem with that?

Ted Michalos: Well, then you have the same issue we had with the first recommendation in that you’ll just find someone else or worse you’ll got to a non-regulated borrower. And so that’s code for the guy on the shop floor who’s going to lend you money.

Doug Hoyes: Or the guy on the internet who’s in a different country and isn’t subject to any kind of rules. So, again, you know, not a totally bad idea, it just wasn’t something that we were prepared to recommend. The third thing that we thought about and I think you eluded to this one earlier as well is why not have an extension of the time permitted for repayment. So, your typical payday loan you’ve got to pay it off your next payday, which means I’m in a big crunch in a week’s time, why not have payday loans that can run for a month, three months, six months, what’s the problem with that?

Ted Michalos: And effectively the companies have done this themselves as a way to recover even more money. All it does is stretch out the pain. Once you get two, three, four thousand dollars worth of debt from a payday loan, even if you switch it to that installment loan, repay it off over six months, they’re going to do that at 60% interest, which is what I was talking about earlier. So, it still isn’t a deal. Really if you get into that kind of trouble you need to find some traditional sources of money, a bank loan, a line of credit, something that well, 12%, a credit card at 18% is better than 60% on one of their loans or the 468% you’re paying on the first one.

Doug Hoyes: Yeah and we’re going to talk about some positive things that people can do. But you’re absolutely right, if I’m paying a massive interest rate, paying for longer isn’t going to solve my problems. So, we did recommend three things though that we think are again based on our specific knowledge our specific review of the data, our clients that we would recommend to enhance consumer protection in Ontario.

So, I’ll rhyme off the three and then we can talk about them, number one a requirement to advertise the annual percentage rate, number two a requirement to report all short-term loans to the credit reporting agencies and number three a prohibition against introductory rates for payday lenders. So, let’s start with number three first.

Ted Michalos: Yeah, let’s do that.

Doug Hoyes: because you’re a big fan of this one, teaser rates. So, a teaser rate, well explain it to us, what is a teaser rate and what’s the issue there?

Ted Michalos: So the most common example of a teaser rate is that, you know, we’ll only charge you the admin fee for your first payday loan. So, you don’t have to pay that $18 on the 100 for the first two weeks, it’s a $20 fee. Well, that’s great, you’ve got your $300, you’re able to pay your bill. Two weeks later roll around, you pay it off on the payday and now you’re short again.

Well, I got that first loan that worked out really great, I’ll get a new one just to replace it. Well, the new ones at 18 bucks on 100. And so, you’re on the treadmill now and there’s no way to get off. So, what the teaser rate does is it makes it artificially less painful to get started down this horrible path that you’re about to follow.

Doug Hoyes: Now I know why drug dealers will give you a free sample.

Ted Michalos: Yeah, in the last show I used that as an example and some people told me it was somewhat offensive. But that’s the truth, it’s like giving someone a first free bag of crack and say here, have this. Sorry, I’m going to get calls again.

Doug Hoyes: Yeah but we’re not going to edit it out. I told you we were going to get into trouble with this show. So, I’ll have the government mad at us and I guess we’ll have everyone else. As I said earlier the, you know, Ontario payday loan users are borrowing from payday loan lenders, it’s not because they can’t access any other credit but because they have exhausted all other options. So, whether there’s a teaser rate or not, they’re still borrowing you’re not helping things. We decided against that as a – so, we are opposed to teaser rates. It’s as simple as that.

Now I think there’s a much bigger issue and this I think would be my number one one and that is the disclosure of the cost of borrowing. So, our objection is that $18 on 100 sounds like a great deal, it isn’t. So, let’s talk in terms of annual interest rates. If we were disclosing the annual interest rate 18 on 100, I mean the math isn’t that hard, right? I borrow 18 let’s assume every two weeks, okay?

Ted Michalos: Which is what the average person – the payday loan lenders don’t tell you how long it takes to actually stop using them, which would be a stat I would love for them to publish too.

Doug Hoyes: Yeah and in a lot of cases it’s forever. So, I go in, I borrow $100 two weeks later I pay it back with interest so I’m paying back $118. And then I borrow again, I do that all year long so I’m doing it 26 times so $18 times 26 times is -?

Ted Michalos: 468.

Doug Hoyes: $468. So, since I’m borrowing $100 the interest rate is 468%.

Ted Michalos: And that’s an easy example. Get your head around that folks. You borrow $100 and you pay it back every two weeks, at the end of the year you’ve paid $468 in interest on your 100 bucks.

Doug Hoyes: And a high interest credit card is what?

Ted Michalos: 29%.

Doug Hoyes: So, 468’s a lot more.

Ted Michalos: Well, and the government sets usury at 60%. That’s why those installment loans are at that rate. Anything higher than that is criminal.

Doug Hoyes: And the only reason this isn’t criminal is there’s a specific prohibition in the criminal code that gives them an out. It says oh well, if you’re a payday lender you’re okay.

Ted Michalos: If you’re a payday lender you’re allowed to be a criminal.

Doug Hoyes: Oh now we’re going to get letters from the payday loan industry too.

Ted Michalos: Yes we are.

Doug Hoyes: So my point is if you went into a payday lender and instead of them saying oh it’s only 18 on 100 they said the interest rate is 468%, would that mean something different? I don’t know but I don’t see how it can hurt.

Ted Michalos: Well, at least then you’re making an informed decision and you’re not diluting yourself that it’s 18%. I mean our assumption is that part of this – I mean I know you need the money, that’s why you’re going there and you don’t think you can get the money anywhere else. But you say okay, it’s $18 on 100, it’s not a big deal. If somebody had a big sign behind the counter that said no, no it’s 468 bucks on 100, my guess is you’d reconsider.

Doug Hoyes: And over the course of the year that’s exactly what it is. But because you’re paying it in two week increments, it looks like a smaller number. So, we’re big fans of disclosure, the cost of borrowing. It doesn’t cost any more to do that, it’s not that complicated.

Ted Michalos: And if you made the decision then you’ve made the decision, yeah. We’ll respect it. I won’t be impressed by it but at least we’ll respect it.

Doug Hoyes: Yeah. We’re certainly not saying oh, all payday lenders must be shut down because all that does is drive people underground. Let’s make it obvious what they’re doing and then let the consumer decide.

So, our third recommendation has to do with credit bureau reporting. So, based on our review of our client’s credit bureau reports and we get them all the time, they bring them in so we can take a look at them. A lot of short-term lenders do not report active payday loans to the credit reporting agencies, I’m talking about Equifax and TransUnion here. Some of them are starting to but it’s kind of hit and miss at the moment.

So, as a general rule no, they don’t because it lasts for such a short period of time that by the time you report it, it’s already gone. Our opinion is they should be reported and I think there’s two reasons for doing that. So, Ted what’s the first and most obvious reason for reporting these things to credit bureaus.

Ted Michalos: So, the most obvious reason is so there’s a record so people can see how many of these things you have, what your total debt is and they can see the pattern of borrowing.

Doug Hoyes: And that, when you say see it, obviously the payday lenders can see it but so can the other lenders.

Ted Michalos: Any other lenders, that’s right.

Doug Hoyes: And so hey, wait a minute, there could be some hidden loans here that are a problem. Now I think a second good reason for reporting to credit bureaus is I think it actually helps the borrower.

Ted Michalos: I agree.

Doug Hoyes: Because if you are paying back these payday loans, then that in theory should be improving your credit score.

Ted Michalos: Right, particularly when you take into account the interest. So, I mean the whole idea behind a credit report is not necessarily to help you the consumer, it’s to help the lenders. It’s to show a pattern of your handling credit responsibly. So, our argument is if you’re paying off the loan the way you’re supposed to be then you should get credit for paying off the loan.

Doug Hoyes: And so as a result of that you may then be able to qualify for more traditional lending. Maybe you can get an actual credit card, bank loan line of credit because you’ve now built up a positive history.

Ted Michalos: What I’m waiting for is the major banks to get into payday lending because then they’ll keep switching you to new products. But I don’t see that coming.

Doug Hoyes: Well, in Vancouver it’s already happened, VanCity Credit Union. And you can send us an email over at hoyes.com if you’re going to be offended by what we’re about to say. But in effect a few years ago they did get into the short-term lending. And of course they promote it as being much more positive, they’re not charging the maximum rates. They’re trying to work with customers, they’ve got longer repayment terms and so on. And so yes, I would agree it’s probably not as quite as bad as a traditional payday loan but it is still a serious problem.

So, let’s get into some recommendations here. because we’ve talked about all the numbers, people are listening to us here, we’ve already said what we would recommend the government do and of course they didn’t invite us so, you know, we are however sending a written report to them so they will have our recommendations.

Ted Michalos: You know what’s fascinating when they were doing the research for this they did a dog and pony show across the province. And we attended a couple of those and they got all our reports from the past so they’re aware of all these numbers, they were intensely interested in fact, we got follow up emails asking for explanations.

Doug Hoyes: Oh yeah and I’ve talked to civil servants who are in the departments who craft this legislation. So, yeah they’re absolutely aware of it and I’m not saying the government’s deliberately stone walling us or anything like that. I mean maybe they are, maybe it’s a conspiracy but it could be as simple as like the hearings go from 4-6:30pm, three nights. They’re in –

Ted Michalos: And they know exactly what we were going to say.

Doug Hoyes: Yeah, so okay maybe there’s a perfectly valid reason why Doug and Ted don’t get to go to Toronto. But that’s the government side of it, let’s talk about people now. So, okay what are your comments then Ted on payday loans in general and if someone has payday loans, what should they be thinking about, what should they be doing?

Ted Michalos: So, ladies and gentlemen, the first thing you have to recognize is that the payday loan in and of itself is not the problem, the payday loan is the symptom, particularly if you have multiple payday loans. If you find yourself having to borrow, one, two, three or more as many of our clients do, there’s an underlying issue. You’ve already got too much debt, you’re over extended, you need to assess what you’re doing and change the way you’re doing it. What’s the definition of insanity? just keep doing the same old thing and expecting a different result. Payday loans are so insane.

Doug Hoyes: So, okay I’m thinking of getting a payday loan because I’m tapped out everywhere else, that’s the common reason. What else can I do? I mean I’m strapped, I got my rent is due in three days and my paycheque comes out in six days, what am I supposed to do?

Ted Michalos: Yeah. Alright well, so let’s start with some basic ideas. Figure out who the next most pressing creditor is, and the example you just gave Doug is the rent, and talk to them. See if they’re willing to give you three days before you have to pay the rent. Most landlords are. This won’t solve your long-term problem but it will stop you from going and getting that payday loan, which will just make all your other financial problems worse.

So, negotiate with the people that you owe. You will find most of them will be helpful because they recognize at some point if you get to the point where you can’t pay their debts, you’re going to look to other solutions and we’re going to talk about those too.

Doug Hoyes: Yeah. And I guess, well, the prime other solution if you have a whole bunch of debts, and again we’ve already said it, the person who is our client who has a payday loan has in total around $34,000 of unsecured debt of which around $3,000 is payday loans. Well, that means there’s, you know.

Ted Michalos: Credit cards, lines of credit, installment loans.

Doug Hoyes: Which are the real problem. You already said it, the real problem is not the payday loan, that’s a symptom. The real problem is the overall level of debt. So, okay I’ve got too much debt, obviously I need to be talking to a Licensed Insolvency Trustee, like you or me, what kind of things are you going to tell someone in that situation?

Ted Michalos: Well, so if you’ve got too much debt you need to look to first why did you acquire and what can we do to either rationalize it, restructure it or maybe you’ve got to do something to reduce it. So, the first thing we always ask is there some way that you can restructure your debt? Get a consolidation loan or a line of credit or something so you can take some of these more expensive forms and pool them together. If you can access a new loan at a traditional lender, that’ll stop you from needing that payday lender. And that’s critically important compared to this. It doesn’t solve the overall problem but it may make your cash flow more manageable.

I mean there are other solutions to consider when you’ve got excessive debt. We do shows about this all the time. So, should you do something called a debt management program where there’s no new interest on your debt, you repay them over time. Should you be looking at a legal remedy consumer proposal or worst case scenario, bankruptcy? We don’t want to turn this show into a discussion about those solutions, we’ve done shows on them. It’s just that if you’re at the point where you’re dealing with more debt than you can handle, probably you don’t have the skills yourself. You need to look at outside the box, talk to a professional. You got sore tooth, you go see a dentist, you got excessive debt, you should go see a Licensed Insolvency Trustee.

Doug Hoyes: Well and ask yourself a simple question if I do nothing if I keep going the way I’m going what will happen, what will change? So, I’ve got a payday loan, I’ve got –

Ted Michalos: No, I’ve got three payday loans.

Doug Hoyes: Three payday loans, I owe $3,000, next week I’m going to have to come up with, you know, $3,500, $4,000 to pay these things off plus interest. I’m not going to be able to do it unless I go and get even more payday loans and continue the cycle. At some point you’ve got to jump off the hamster wheel. The cycle has to end, that’s the only answer. So, if you’ve got one payday loan, you’ve got your tax refund coming in next week and you can pay it off, great, fine. You know, lesson learned. But if you’ve got multiple ones, ask yourself that basic question, is it possible to pay it off?

Ted Michalos: Yeah, remember what we said, the average person we see owes $1.21 for every dollar of take home pay, just in payday loans.

Doug Hoyes: Yes, so this is of our payday loan clients, that’s a huge number. You can’t pay it back.

Ted Michalos: Well, you can’t. I mean if you owe $3,000 and you’re only going to get paid $2,300, how do you pay if off? You can’t, you’ve got to borrow another $3,000 plus the interest.

Doug Hoyes: Yeah, you can’t argue with math. I think it’s as simple as that. Well, I think that’s a great way to end it. There are some practical tips there. What I would encourage everyone to do is go to our website at hoyes.com, we have tons of links to all the previous shows we do. We’ve also got links to how you can deal with payday loans, what some of the alternatives are, it’s all there. So, hoyes.com is where all that can be found.

So, my final thought on all of this is I’m not a big believer in the power of government to help us make good decisions. I don’t think Ted’s probably a big believer in that either.

Ted Michalos: This particular government or government in general?

Doug Hoyes: Well, I mean frankly governments in general, I’m not sure they’re the solution. I mean I believe that the only way to eliminate the catastrophe that is payday loans is for people to stop getting them. If there were no customers, there would be no payday loans and there would be no need to have committees to pass laws to regulate them.

That’s why Ted and I wanted to appear before the committee of the legislature to share our research in an attempt to shine a light on this problem. That’s why we write blogs and appear in the media, that’s why we do this podcast. Understanding the true cost and implications of payday loans and understanding the alternatives should show everyone that high interest short-term loans are not the answer.

But it’s not just the numbers that matter. I already made the point that 60% of Ontarians aged 18 to 34 surveyed in our Harris poll last year said they would definitely or probably recommend payday loans to family, friends and coworkers. So, how is that possible with interest rates of 468%? Is it as simple as they don’t understand the math? Well, sure that’s a part of it, which is why we’re arguing for better disclosure. But there’s more to it than that.

Have you gone into a traditional bank lately? They’re reducing the number of actual human employees. They want you to do everything online or at one of their machines. There’s a new branch of a big bank that just opened near our office in Kitchener and there are no tellers. But there are four bank machines for deposits, cash withdrawals and you can even get U.S dollars from one of the machines. That’s where the banks are going, fewer employees, more machines. And that branch doesn’t even open until 11:00 A.M. That’s why all the bank stocks in Canada are at record highs, they’re making lots of money using more technology and fewer people.

But what if you’re someone who wants to deal with a real person? What if you want to cash your paycheque and you need the cash now and you don’t want to use a machine? What if your cheque is from a new employer and the bank wants to put a 10 day hold on it and you need the cash now? There’s an answer, payday loan places. They’re happy to cash your cheque for you, no questions asked. Sure they charge a high fee, but they won’t ask for a lot of I.D, they won’t put a 10 day hold on it and they have lots of stores with extended hours and their people are friendly. And hey, while you’re in there cashing a cheque, maybe we can give you a payday loan as well. That’s a big reason why people go to payday loan stores. They’re more friendly and more convenient than the big banks so the cost is less of an issue.

If you’re a banker listening to this, take note. The payday lenders have found a way to compete with you and in some areas, they’re winning. And if you’re listening to this and you’ve never gotten a payday loan and you think people get them just because they’re naive, think again. Many people make a conscious decision to avoid the banks because they prefer the service at payday loan places. They are actually making a rational decision. Think about it.

That’s our show for today. Full show notes including links to everything we discussed and links to all of the applicable legislation and our submission to the subcommittee can be found at hoyes.com that’s h-o-y-e-s-dot-com and all of the stats that we talked about regarding payday loans can be found on a special link joedebtor.ca/paydayloans.

Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

The post Yes, We Have A Payday Loan Crisis appeared first on Hoyes, Michalos & Associates Inc..

That’s an annual interest rate of 546%, and that’s a big problem but it’s not illegal, because although the Criminal Code prohibits loan interest of more than 60%, there are exceptions for short term lenders, so they can charge huge interest rates.

Note: the maximum cost of a payday loan was updated in Ontario to $15 per $100.

The Ontario government knows this is a problem, so in 2008 they implemented the Payday Loans Act, and in the spring of 2016 they asked for comments from the public on what the maximum cost of borrowing a payday loan should be in Ontario.

Here’s my message to the Ontario government: don’t ask for my opinion if you’ve predetermined your answer. It would appear that the provincial government had already decided that, to them at least, the solution to the payday loan problem was simple: reduce the rate that payday lenders can charge, so that’s all they are doing.

Maximum Cost of Borrowing for a Payday Loan To Be Lowered in Ontario

In a letter released on August 29, 2016 by Frank Denton, the Assistant Deputy Minister of the Ministry of Government and Consumer Services announced that they are lowering the borrowing rates on payday loans in Ontario, and we all have until September 29, 2016 to comment. It’s interesting to note that this wasn’t important enough for the Minister, or even the Deputy Minister to comment on.

Under the proposed new rules, the maximum a payday lender can charge will be reduced from the current $21 per $100 borrowed to $18 in 2017, and $15 in 2018 and thereafter.

So to put that in perspective, if you borrow and repay $100 every two weeks for a year, the interest you are paying will go from 546% per annum this year to 486% next year and then it will be a great deal at only 390% in 2018!

That’s Good But It’s Not A Real Solution

I think the province asked the wrong question. Instead of asking “what the maximum cost of borrowing should be” they should have asked “what can we do to fix the payday loan industry?”

That’s the question I answered in my letter to the Ministry on May 19, 2016. You can read it here: Hoyes Michalos comment submission re changes to Payday Loan Act

I told the government that the high cost of borrowing is a symptom of the problem, not the problem itself. You might say if loans cost too much, don’t get a loan! Problem solved! Of course it’s not that simple, because, based on our data, people who get a payday loan get it as a last resort. The bank won’t lend them money at a good interest rate, so they resort to high interest payday lenders.

We commissioned (at our cost) a Harris Poll survey about payday loan usage in Ontario, and we discovered that, for Ontario residents, 83% of payday loan users had other outstanding loans at the time of their last payday loan, and 72% of payday loan users explored a loan from another source at the time they took out a payday/short term loan.

The majority of Ontario residents don’t want to get a payday loan: they get one because they have no other choice. They have other debt, which can lead to a less-than-perfect credit score, so the banks won’t lend to them, so they go to a high interest payday lender.

Sadly, lowering the maximum a payday lender can charge will not solve the underlying problem, which is too much other debt.

Fixing the Payday Loan Industry Properly

So what’s the solution?

As an individual consumer, if you are considering a payday loan because of all of your other debt, you should deal with your other debt. If you can’t repay it on your own a consumer proposal or bankruptcy may be a necessary option.

Instead of taking the easy way out and simply putting a Band-Aid on the problem, what could the government have done to really make a difference? We made three recommendations:

1. The government should require payday lenders to advertise their loan costs as annual interest rates (like 546%), instead of the less scary and less easy to understand “$21 on a hundred”. Faced with a 546% interest rate some potential borrowers may be encouraged to look for other options before falling into the payday loan trap.
2. I think payday lenders should be required to report all loans to the credit reporting agencies, just as banks do with loans and credit cards. This may make it more obvious that a borrower is getting multiple loans (of our clients that have payday loans, they have over three of them). Even better, if a borrower actually pays off their payday loan on time their credit score may improve, and that may allow them to then borrow at a regular bank, and better interest rates.
3. “Low introductory rates” should be prohibited, to lessen the temptation for borrowers to get that first loan.

Opening Up To Worse Alternatives

Unfortunately, the government did not take any of these recommendations, so we are left with lower borrowing costs, which sounds good for the borrower, but is it? This will reduce the profits of the traditional payday lenders, and it may force some of them out of business. That’s good, right?

Perhaps, but here’s my prediction: To cut costs, we will see an increasing number of “on-line” and virtual lenders, so instead of going to The Money Store to get your loan you will do it all on-line. Without the costs of storefronts and fewer employees, payday lenders can maintain their profit margins.

On the internet, rules are difficult to enforce. If a lender sets up an online payday lending website based in a foreign country, and electronically deposits the money into your Paypal account, how can the Ontario government regulate it? They can’t, so borrowers may end up with fewer regulated options, and that may, paradoxically, lead to even higher costs.

Getting a loan online is also much easier. Now that it’s ‘cheaper’ I predict we will see an increase, not a decrease, in the use of payday loans and that’s not good, even at $15 per $100.

The government of Ontario had an opportunity to make real changes, and they didn’t.

Borrower beware.

You are on your own. The government will not protect you.

The post Why the Ontario Government Didn’t Come Down Hard Enough on the Payday Loan Industry appeared first on Hoyes, Michalos & Associates Inc..

On today’s podcast, I speak with Jonathan Bishop, a Research and Parliamentary Analyst at the Public Interest Advocacy Centre (PIAC) about Bill 156 and pay day loan regulation. The PIAC is a non-profit organization that conducts research into public service issues that affect consumers. The payday loan industry is something they have been investigating for well over a decade.

History of Payday Loan Legislation In Ontario

Before 2007 interest rates were limited to a maximum of 60% under the Criminal Code of Canada. The Criminal Code was amended in 2006 to allow payday lenders under provincial regulation rather than under the usury laws of the Criminal Code. Payday loans would be allowed to charge more than 60% as long as provincial legislation existed to provide set limits around the cost of borrowing even if this exceeded the criminal code rate. In reality Ontario payday loans were already operating at that time so the amendment to the law prior to 2007 permitted what was already occurring with payday loans in Ontario.

Ontario itself enacted the Payday Loans Act in 2008, limiting fees to $15 per $100 borrowed for two weeks as of January 1, 2018.

Is Payday Loan Regulation Changing? 

Currently, Ontario is considering revisions to the existing laws that govern payday loans through Bill 156. The consultation process began when the Premier committed the Minister of Government and Consumer Services to:

explore opportunities to increase protection for vulnerable and vetted consumers such as modernizing payday loan legislation.

PIAC responded to the initial call for comments with a 50-page policy analysis and a recent research report on debt collection practices. Bill 156 was the result of the consultation process.

One of the changes proposed in the bill will affect repayment time. If you get a third payday loan, the loan becomes an installment loan that has to be paid back over a period of 62 days instead of two weeks. This is to help break the payday loan cycle of someone trying to repay a payday loan with a payday loan from another payday loan lender.

As Jonathan says:

One of the other outstanding issues with a payday loan product is that onetime balloon payment in terms of the borrower has to pay it back all at once. There’s no kind of steps to doing it or planning. It’s just ‘here’s my paycheque. Oh here you go, you’re the first in line ’cause you have my paycheque, so I don’t have any choice’… rather than if you say two paycheques or three paycheques to pay it off.

Jonathan also mentioned that part of the challenge with payday loans is access:

• Traditional financial institutions move out of a neighbourhood in a process called ‘redlining’ to focus on geographic areas and products offering a higher return.
• Additionally, small ‘mom and pop’ businesses historically provided some of the basic services of a bank for a nominal fee, such as cashing a cheque. The proliferation of big box stores has squeezed small businesses out of the market, further reducing a community’s access to affordable financial services.

Payday lenders and alternative cheque cashing services move in to fill the void but at a high cost.

Possible Solutions to Payday Loans

A possible solution that Jonathan offered, was that a trusted authority such as the Ministry of Consumer Services could provide the community with the locations and business hours of alternatives that are within walking distance or within their neighbourhood.

In addition, another solution the PIAC put into its submission to the Ontario Government, was that the government should support legitimate micro-credited initiatives by partnering with local financial institutions to make this financial product available. The goal being that these micro-loans would be a competitive product that satisfies the need for immediate cash without trapping a person on in a payday debt cycle.

Other structural changes Jonathan would like to see in Bill 156:

• some lengthening of the repayment period,
• a limit on the number of payday loans a person can borrow in a given year
• a reduction in the allowable cost of borrowing, and
• lenders should be required to consider the borrower’s ability to repay the payday loan before granting credit.

He notes that in Manitoba, a payday loan cannot be more than 30% of the borrower’s net income. In British Columbia and Saskatchewan, the limit is 50% of the borrower’s next paycheck. The PIAC, recommends that the limit should be no more than 5% of the borrower’s monthly income to give the borrower enough money for other living expenses.

Doug acknowledges that some of the changes proposed in Bill 156 may help, but he is concerned that the bill isn’t addressing the underlying problem with payday loans – debt:

[Borrowers] are maxed out on their credit cards and they can’t borrow from a bank so they turn to payday loans. If we could address the underlying problems, one of which is excessive of debt, perhaps the need for payday loans would be greatly diminished.

Learn more by reading the full transcript below.

Resources Mentioned in the Show

• Public Interest Advocacy Centre
• Bill 156: Alternative Financial Services Statue Law Amendment Act 2015
• Criminal Code of Canada

FULL TRANSCRIPT show #85 with Jonathan Bishop

Today we’re going to talk about a topic we’ve discussed here before on Debt Free in 30, payday loans. You’ve heard me give my thoughts on payday loans and I’ve other licensed insolvency trustees and credit counsellors on the show to discuss the evils of payday loans. We all know the problem, they charge very high interest rates. In Ontario, they can charge $21 on $100 loan so if you get a new $100 loan every two weeks you end up paying $546 a year, which on $100 loan is a 546% interest rate on an annual basis.

That’s the problem with payday loans but what’s the solution? Should the government have a greater role in regulating payday loans and short-term loans? Is that the solution? Would it work? If so, what should the government actually do? We already have laws regulating payday loans in Ontario, and most other provinces, and that hasn’t solved the problem so is the government the answer? That’s the question I want to ask my guest, who isn’t a licensed insolvency trustee or credit counsellor and he doesn’t work for a bank or payday lender.

So, let’s get started. Who are you? Where do you work and what do you do?

Jonathan Bishop: Good morning Doug. Thank you for having me. My name is Jonathan Bishop, I’m a Research and Parliamentary Analyst at Public Interest Advocacy Centre here in Ottawa. I do policy research on a variety of subjects, and including payday loans and financial service issues.

Doug Hoyes: Can you tell me what the Public Interest Advocacy Centre is? So, you – do you go by the initials, how do you refer to it?

Jonathan Bishop: Well, around the office we go by PIAC. Anybody that deals with us on a regular basis, that’s kind of what we’re known by. But the Public Interest Advocacy Centre is a non-profit organization and charity that provides legal and research services on behalf of consumer interests and particularly vulnerable interests concerning the provision of public services.

Doug Hoyes: So, you’re looking at people who – you’re doing research into issues that help real people. You’re not trying to figure out a way to make banks more profitable, you’re dealing with the actual real person is what you’re doing.

Jonathan Bishop: Yes.

Doug Hoyes: So, what kind of projects have you worked on in the past?

Jonathan Bishop: The past two or three years myself, I’ve worked on issues relating to wireless data roaming, the commissioner for complaints of telecommunication services, payday loans obviously, loyalty programs, online group buying, the amount of money you pay to receive a paper bill for communications or a financial institution bill on a month basis, things of that nature.

Doug Hoyes: So, a wide variety of things, so let’s talk then about payday loans. So, you’ve done some research into this area why don’t you start me off with a short history lesson then. So, what is the state of payday loan legislation, you know, in Canada and in Ontario whatever, wherever you want to start.

Jonathan Bishop: Sure, the Public Interest Advocacy Centre has been investigating payday loans for well over a decade. Prior to 2007 the maximum for all rates for all loans in Canada, according to the criminal code was 60%. However at that time an exemption to the criminal interest rate was passed to allow payday loans, which were operating in Ontario at that time, in provinces that opted to permit it. So, Ontario had them but they didn’t have any regulations around it. So, the amendment to the criminal code in 2007 kind of permitted what was already there. To my knowledge on Newfoundland and New Brunswick are the provinces remaining that don’t have active payday loan legislation.

Quebec for example has gone a different route than many of the provinces by limiting the criminal rate of interest to 35%. This has in effect curtailed the operation of payday lenders there.

Doug Hoyes: Just a question on that then, so in Quebec the maximum interest rate that can be charged I guess by any lender is 35% is that correct?

Jonathan Bishop: That’s my understanding, yes.

Doug Hoyes: And that’s curtailed payday lending just because it’s not profitable to do it.

Jonathan Bishop: That’s my understanding. I know there are still storefronts there but they’re not offering products on a similar basis as they do in other provinces.

Doug Hoyes: Got you. Whereas, where I said in the introduction at a place like Ontario here, the maximum interest rate, which is governed by federal law, as you said, which are governed by the usury laws I guess, is 60% but the payday loans get around that. Is it because of this specific provision that you talked about going back to 2007?

Jonathan Bishop: That’s right.

Doug Hoyes: That’s what it is, okay. So, they’re charging on an annual basis a higher rate of interest but there’s a special rule that allows them to do it is essentially what happened, okay.

Jonathan Bishop: When the amendment was introduced in 2007, the provinces were told that you could regulate the interest on, you know, the maximum rate of borrowing a payday loan if legislative measures that protect recipients of payday loans and that provide for limits on the total cost of borrowing under the agreements were put in place. So, what’s happened is that’s occurred in many of the provinces. New Brunswick’s established payday regulation, but they haven’t put it in place yet. They haven’t finalized it.

Doug Hoyes: Got you. So, these laws have been in place in Ontario for a number of years. And yet I understand that, and I think you were probably the one that made me aware of this, that Ontario is now considering revisions to the existing rules. So, this is Bill 156, am I correct?

Jonathan Bishop: Yes, you are correct.

Doug Hoyes: So, tell me about Bill 156. What’s the point of Bill 156?

Jonathan Bishop: Sure. Bill 156 was introduced in Queen’s Park in December. It began its political life as basically a sentence in the mandate letter in 2014 from the Premier to the Minister of Government and Consumer Services, committing the ministry to quote explore opportunities to increase protection for vulnerable and vetted consumers such as modernizing payday loan legislation, unquote.

So, in to order effectively check that box, the ministry began a consultation process last summer asking for comments. They issued a paper that had about 22 questions in it. The Public Interest Advocacy Centre answered that call with a 50 page document policy analysis and we also attached a recent research report on debt collection practices because that was part of the questions that were asked by the ministry. And so Bill 156 is the end result of that consultation process.

Doug Hoyes: We’re now in the spring, it’s April of 2016, the bill as I believe has gone through first reading, presumably there’ll be lots of committee work, and so on and so forth. So, would you agree with me that’s it’s unlikely that we’re going to see any new legislation in 2016. Is this more likely that it’s 2017 if anything happens or could it happen quicker than that?

Jonathan Bishop: It could happen quicker than that if there’s a political will to make it happen. However, with Bill 156 a lot of where the rubber’s going to hit the road, so to speak, will be when regulations are established. And that won’t be until 2017 even if the political will is there to pass this bill by the end of 2016.

Doug Hoyes: Got you. And obviously they have the votes because it’s a majority government in Ontario right now. But it’s whether they want to do it. And you’re right, the devil is in the details, the legislation itself will contain a few lines, but then there are regulations which actually spell out how it works. And I think this is exactly what we saw with the legislation that I believe came into being in 2015, in Ontario with respect to debt settlement agencies for example. The legislation itself was reasonably short but then there are regulations that actually spell out how it works. So, it’s the same concept, I guess, that we’re going to have to wait to see the regulations. But, what is specifically included in Bill 156 now that would impact on payday lenders?

Jonathan Bishop: Well, specifically there are rules in here, in 156, to change restrictions applicable to replacement payday loans. So, for instance in the Bill there’s rules saying if you get to a third payday loan in a period of time, then that payday loan becomes essentially, they don’t say so, but essentially an installment loan that has to be paid over 62 days rather than a two week period or a, you know, that kind of thing. They’re going to attempt to lengthen out the repayment time specifically. There’s a couple of other nuances in here as well.

Doug Hoyes: But is that the big change then?

Jonathan Bishop: That is one of the big changes, yes.

Doug Hoyes: So, right now I go get a payday loan, it’s due on payday, which is two weeks from now. So, two weeks from now I’ve got to come up with the money to pay it plus I’ve got to pay the charge that was added on top of it. So, my $100 loan I’ve got to pay back $121 but I don’t have the money so I go to – I can’t go to the same payday loan place and borrow again. I can’t get a loan from company A to pay off the loan from Company A under the existing rules. But I can go to Company B, borrow from Company B, come back to Company A and pay it off. Under the new regulations if I get a certain number of loans from the same company in a predefined period, the third loan can’t be just another two week loan, it’s got to have a longer time period, am I understanding the gist of it correctly?

Jonathan Bishop: That’s right. If you get into a third payday loan agreement within 62 days, then that third agreement has to be repaid in 62 days.

Doug Hoyes: Got you, Okay. So, what they are trying to do is break this cycle. So, let’s get into some solutions here then. So, we understand now conceptually what the rules are today in Ontario and in many provinces there is a cap on how much a payday lender can charge. And under the new rules there will be, perhaps, the requirement to extend the payment terms to give someone a little bit of extra time to pay them off.

I want to hear your thoughts on what possible solutions there are then. So, should the government just adopt Bill C-156 and does that correct all our problems? Well, I’m sure the answer to that question is no. So, why don’t you walk me through some specifics solutions that – I don’t want to say that you are advocating them but things that you think are at least worthy of consideration? Where would you start?

Jonathan Bishop: Well, there are a number of potential solutions to investigate from the mundane. So, when part of the problem with payday loans or the challenge is access. Consumers have lost access in many instances to traditional financial institutions just because they’ve moved out their neighbourhoods.

So, in instances such as that, it may be beneficial to consumers if the Ministry of Consumer Services say, a trusted voice were to – it would provide them with locations and business hours of alternatives that are within walking distance or within the neighbourhood, rather than waiting then having a payday loan institution come into their neighbourhood that replaces the bank, so to speak, geographically. And then, you know, then operates

Doug Hoyes: So, what you’re saying is that banks now, there are fewer branches than there used to be. If we looked at the number of branches 20 years ago and the number of branches today, it’s a lower number. And a lot of that is because we now all do online banking and things like that. And what you’re saying is a lot of the branches that have closed, have closed in perhaps, less affluent neighbourhoods and so those people perhaps don’t have access to cars to go into the next neighbourhood to use the bank. And as a result, perhaps, they’re being more drawn to payday lenders who are on every corner, sort of like a coffee shop. So, you’re saying one possible solution then would be to provide different physical location access then.

Jonathan Bishop: Yes, that’s correct. I mean there is a little more to it than that, but yes. Researchers in this field call this whole process redlining, where banks essentially redline a neighbourhood and move out because they want to focus on products that provide more return on investment. So, rather than say being in one central area of Toronto, they’ll move out to a place like Whitby where they can concentrate on financial products to get a little better return, leaving that inner city neighbourhood without that financial institution.

Another part of this that we found is the evolution of big box stores kind of crowding out local retailers, where those local retailers used to do things like say cash a paycheque for a fee. Now with the removal of that local retailer, some citizens are left with having to go to another organization that might charge an exorbitant fee in order to do something simple like cash a cheque.

Doug Hoyes: So, the local grocery store, hardware store used to fulfill some of the functions of a bank, like cheque cashing for example. Just, I want to make sure I understood then on the first point about the redlining and the banks moving out, so you are suggesting, what as the alternative, that different organizations then come into pick up the slack, so to speak?

Jonathan Bishop: Well, there are a couple of – that’s happened in other jurisdictions. Say for instance credit unions have come into the fray with products and offerings that are somewhat similar to a payday lending product. I can think of the good folks at Vancity have offered I think it’s fast and free loan or something, fast and friendly loan or something of that nature.

In Montreal, going back to the Quebec example you alluded to earlier, there’s an advocacy group that works in conjunction with financial institutions to offer a longer-term loan product at a very low interest rate. I believe in Thunder Bay there’s also a movement to offer a product that’s in competition with a payday lending product. There are small – they’re examples, but they’re kind of few and far between and sprinkled throughout the country in terms of products that could be comparable to a payday lending product.

Doug Hoyes: Got you, so it may be credit unions, it may be other types of organizations that pick up the slack. So, okay, so back to the solutions then, so I’ll let you continue. We talked about access, we’ve talked about how big box stores have crowded out some of the small retailers that were providing some of the functions of banks. What are some of the other things on your list of possible solutions?

Jonathan Bishop: When there’s a little bit more of creative solutions, one of which PIAC had put into its submission to the Ontario government and it’s that the government could consider supporting legitimate micro credited initiatives to replace the high cost of these alternative financial service loans. With micro credit options – so, you’d have to – we suggest the government partner up with say local financial institutions in order to make these offerings. So, it’s not just relying on those folks like say a credit union to kind of enter into this field but provide some incentive to enter into this field in order to help consumers. So, that’s one of those more original options.

Doug Hoyes: So, when you say micro credit, what do you mean by that? You’re talking about loans that are under a certain amount, is that really what micro credit would be defined as, so kind of a loan of under $1,000 or $2,000 or whatever?

Jonathan Bishop: Right, I mean we’ve heard from industry spokespeople in the past that say, look the payday loan product is used to, say – it’s cheaper than say, having my electricity disconnected and then reconnected. Or, you know, going without groceries or going without something for a short period of time and paying a fee, so, for say, like a disconnection.

So, holding these industry folks to their word, put out a competitive product that addresses that need for that immediate cash fix but doesn’t necessarily mean you have to get stuck on debt treadmill.

Doug Hoyes: So, let me play devil’s advocate here. We’ve got the payday loan companies and these other short-term lenders, a lot of them are now internet based, but they’re all out there. Presumably they’re all making a profit. So, I just want to play devil’s advocate here. So, we’ve got these payday loan companies, short-term loan companies that are obviously I guess making money or they wouldn’t be there. The banks don’t want to go into that market because presumably they don’t think they can make money. And so, what you’re saying is well maybe we need to give a little bit of help to either the traditional financial institutions who already make a billion dollars three months, each one of them, or we need to help, perhaps, credit unions or small local initiatives to do this. Well, if the payday loan companies can make money at this why would there be any need to support other people to also do this?

Jonathan Bishop: Well, I would counter that by saying if the payday loan industry was a purely competitive industry that wasn’t just a creation of a regulation or regulator, then these payday loan providers would compete on the basis of price and they don’t compete on the basis of price. They all hover around the maximum of borrowing allowed by regulation. They don’t seem to offer that kind of – I mean other markets don’t lower the price to entice competition, they all just seem to hover above the top.

So, if it’s a structural issue maybe there needs to be some injection of competition through something of a nature like helping out another institution provide a competitive product. Not that they need to subsidize a large corporation like a bank or credit union, but for the benefit of the fairness to the consumer.

Doug Hoyes:  So, if I was to say to you okay Jonathan I have a hundred million dollars in my pocket, and you and I are going to start a financial institution and we are going to focus on micro credit, we’re only going to give loans of $1,000 or less, and we are only to charge a maximum of 10% interest. So, we are going to put the payday loan guys out of business by offering the exact same product at a much lower cost. Would that work or would you and I lose money because we weren’t charging enough?

Jonathan Bishop: I’m not sure if we’d make any money Doug. However, I know that that particular model does exist and it is operating in Montreal. The good folks at Option Consommateurs offer a product in conjunction with a financial institution that charges in interest rate somewhere in the neighbourhood of 5% for a loan that is somewhere in the realm of, I think the limit is $1,000 or $1,500. And it’s payable over a couple of years. It’s not in an effort for it to make Option Consommateurs or the group that’s doing this rich or anything of that nature, it’s just a matter of offering a service to assist consumers. That’s my understanding.

Doug Hoyes: Got you, so it may require then an organization that is doing it not for profit, maybe on break even basis to be able to shoulder the costs of making these types of loans without making or needing to make a huge amount of profit on.

So, okay I’d like to hear some more potential solutions. We’re going to take a quick break though and come back and talk more and maybe you can give me some of your far out ideas on how we can address the payday loan situation.

So, we’ll take a quick break and I’ll be back with Jonathan Bishop. You’re listening to Debt Free in 30.

It’s time for the Let’s Get Started segment here on Debt Free in 30. My guest is Jonathan Bishop from The Public Interest Advocacy Centre. So, Jonathan what do you hope is accomplished with Bill 156 in Ontario.

Jonathan Bishop: What I hope happens as a result of Bill 156 in Ontario, for instance, is that the government introduces some kind of limit to the number of payday loans that borrows can take out in any given year. In addition, one thing at the time to repay those loans would be nice. Reducing the allowable cost of borrowing would be terrific. If that were done so through say a public hearing where organizations in the industry can put forward cases to regulate the maximum cost of borrowing at a certain rate instead of just having it dictated by cabinet, that would be terrific.

And also, the consideration of a borrower’s ability to repay a payday loan product when they applied for a payday loan product would be some very good first steps, PIAC thinks, in terms of addressing some of the outstanding concerns in regard to the offering of payday loans. Because we think there’s a balance there but we don’t think necessarily that balance is found in Ontario at the moment and I don’t think the Ministry of Government Consumer Services thinks so either ’cause otherwise we wouldn’t be having a conversation about a Bill 156.

Doug Hoyes: Right, they wouldn’t be introducing a bill if everything was perfect. So, limiting the number of payday loans you could borrow, would there need to be central database of all payday loan borrowers? Is that how it would work?

Jonathan Bishop: That’s our understanding. That would be our proposal in terms of how that would work practically. Yes, there would be some kind of repository information that a payday lender would have to consult before agreeing to provide a payday loan product to a borrower and hopefully that repository would be administered by The Government of Consumer Services.

Doug Hoyes: And I guess there’d have to be some discussion about what goes into that repository, presumably every loan that is covered by that usury law in the criminal code exemption we talked about would be included.

So, you also talked about lengthening the time a borrower has to repay their payday loan. So, right now I assume the average payday loan is paid in full on your next payday and that’s a hardship because if I needed to borrow $100 two weeks ago, what are the chances that I have $600 to pay off the loan today and I have enough money to survive until my next paycheque. So, by lengthening the time to repay I assume it would make it easier on borrowers. How long do you need to give borrowers to repay? What’s the magic number?

Jonathan Bishop: I don’t know what the magic number is. However the longer you can provide a customer in order to make that repayment the better off they’re going to be in the long run financially rather than get trapped on the, as I refer to it, become a debt hamster or be put on the debt treadmill. Even if it say went from 14 days to 28 days, at least it would give a little bit more time for that repayment process to kind of kick in.

One of the other outstanding issues with a payday loan product is that onetime balloon payment in terms of the borrower has to pay it back all at once. There’s no kind of steps to doing it or planning. It’s just here’s my paycheque. Oh here you go, you’re the first in line ’cause you have my paycheque, so I don’t have any choice, so here you go, you’re all paid at once, rather than if you had say two paycheques or three paycheques to pay it off, you might be able to do it kind of in installments.

Doug Hoyes: Right, because I pretty much have to take out another payday loan to pay off the first one ’cause I have to pay the whole thing off whereas if I was allowed to pay it back in four equal payments, so I’ve got $1,000 loan it’s only $250 of my next four paycheques, that would make it a little simpler, perhaps.

So, final point Jonathan, you had said considering the borrower’s ability to repay before the payday loan company would be able to grant the loan, explain to me what you mean by that and how that would work.

Jonathan Bishop: Okay. In Manitoba, for instance, part of the consideration for a borrower to go in for a payday loan product is that the payday lender has to take into consideration what percentage of net income this encompasses. I think in Manitoba they introduced a limit of 30% of a borrower’s net income in 2010 and then it was reviewed in 2013, so, also in B.C and Saskatchewan, also, borrowing limits of 50% of the net amount of an individual’s next paycheque as a barrier, kind of as a limit, a ceiling for this.

There’s also another theory out there considering the borrower’s ability to repay in order that’s based on a selected basket of expenses. So, something like say the consumer price index that sounds to us like something that’s found in the consumer financial protection bureau’s notes in regard to payday loan regulation in the U.S that says quote, make a reasonable determination that’s sufficient income remains to cover loan costs and estimated living expenses.

Because like I say in the U.S. the CFBP has been looking at payday loan for two or three years now. I would imagine the good folks in The Ministry of Government Consumer Services are looking to that organization for a little bit of guidance as they go through this process as Bill 156.

PIAC takes an extreme view on this particular point. Through our policy research and through a variety of sources throughout North America in terms of payday loan regulation, we’ve determined and we’ve said this to the government of Ontario, that the average limit of borrowing should be about 5% of monthly income and no higher. Otherwise you get into situations where consumers are putting off saying paying for food or other bills or other needed expenses in order to pay off these financial products.

Doug Hoyes: Great. Thanks Jonathan. I’ll be right back to wrap it up. This is Debt Free in 30.

Doug Hoyes:  Welcome back, it’s time for the 30 second recap of what we discussed today. My guest today was Jonathan Bishop, the research and parliament affairs analyst for the Public Interest Advocacy Centre. And he discussed with us the results of the research into the payday loan problem in Canada and he shared with us many possible solutions to help consumers get out of the cycle of payday loan debt. That’s the 30 second recap of what we discussed today.

As frequent listeners to this show know, payday loans are a problem because they charge very high interest rates and they require the borrower to pay the loan in full on their next payday. That’s often not possible so a second payday loan is often taken out to pay off the first one and the cycle continues.

Jonathan made some good suggestions to help alleviate this problem. He suggested if a payday loan lender allowed a borrower to pay off the loan over a few pay periods that may alleviate some of the problem. The math makes sense. Paying $800 on my next payday may leave me with no cash for rent or other living expenses. If I could pay $200 on each of my next four paydays that might leave me with enough cash to cover my other debts, and therefore, not make it necessary for me to keep borrowing to stay afloat.

The proposed Bill 156 in Ontario does include a provision for longer repayment terms so that may help. My worry with all of these tweaks is that they may help a little bit, but they aren’t addressing the underlying problem. A lot of payday loan borrowers have a lot of other debt. They’re maxed out on their credit cards and they can’t borrow from a bank so they turn to payday loans. If we could address the underlying problems, one of which is excessive of debt, perhaps the need for payday loans would be greatly diminished.

I’ve got a lot more to say on this topic but we’re out of time on today’s show so stay tuned for future episodes where we’ll discuss payday loan solutions in more detail.

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