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The true price of payday loans

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Hundreds – probably thousands – of people in Ottawa are paying more than FIVE HUNDRED PER CENT in annual interest to get a loan. And it’s perfectly legal.

Don’t believe it? Then you are not among those who patronize businesses that offer “payday loans.”

A payday loan is just what the name implies. You go into your friendly lender’s shop and borrow a few hundred bucks to tide you over until payday.

And, boy, will you pay through the nose for it!

If you borrow, say, $300 for two weeks, and repay the loan in full and on time, you will pay as much as $63 in interest. That’s a whopping 21 per cent.

A rate of 21 per cent for two weeks works out to an annual interest rate of 546 per cent. And that’s before compounding and any late-payment fees.

Outrageous and surely illegal, you might think. But you would be half wrong. It is outrageous, in my view. But it is not illegal.

Several years ago, the federal government enacted changes to the Criminal Code to permit payday loans if provinces regulated them. Ontario’s Liberal government passed legislation limiting the cost of borrowing to $21 per $100 per two-week period. The law took effect in December 2009.

Not surprisingly, many payday lenders now charge the maximum permitted interest. Well, why wouldn’t they?

It is not known how or why the government of former premier Dalton McGuinty decided that an annual interest rate of 546 per cent was the appropriate level.

In contrast, pawnbrokers in Canada are restricted to charging a maximum of 60 per cent in annual interest. That is the rate charged by Accu-Rate, a leading foreign exchange dealer in Ottawa, which recently entered the pawnbroker business.

Accu-Rate offers loans at five per cent in simple interest per month in exchange for the deposit of valuables such as jewelry or silver.

Money Mart, a leading payday lender in the Ottawa area, recently sought to attract new or repeat borrowers with advertisements proclaiming: “Get a $200 payday advance FREE!”

The ad said the offer was valid only for the first advance or for the first advance in a year.

For clients who accepted Money Mart’s offer, the savings in interest on that $200 loan amounted to $42 if they repaid the loan in two weeks. But how many of those clients were able to repay the loan on time?

Not just anyone can get a payday loan. At Money Mart, applicants must be at least 18. They must have a bank account. And they must prove they have a steady job.

I asked Scott Hannah, president of Canada’s Credit Counselling Society, why anyone would take out a loan at 546 per cent annual interest – or, as the lenders express it, 21 per cent for 14 days?

His response: “In speaking with thousands of consumers with payday loans who come to our organization for assistance, many of these consumers do not fully appreciate the actual rate of interest.”

And, Mr. Hannah adds: “Often we see that consumers who regularly use payday loans do not have access to other sources of conventional credit such as credit cards, lines of credit or overdrafts.” He estimates more than 750,000 Canadians regularly or occasionally use payday loans.

Payday lenders, in other words, are providing a service that a segment of the population needs.

But why does this service cost so much?

People lucky enough to have a credit card frequently grumble at having to pay interest rates of little more than 1.5 per cent per month on their outstanding balance. Give me a break! These people have the convenience of buying on credit, plus the advantage of free credit from the purchase date to the date on which the

monthly bill is due.

For payday lenders, it’s good business to maximize profits, as these lenders clearly do. On top of that, the good clients of payday lenders must pay for the bad ones who default on their loans. Those seemingly exorbitant interest rates are not all profit for the lenders.

Clients of payday lenders, having accumulated large debts of unpaid interest, are sometimes able to escape much of this debt by seeking help from a credit counselling organization. One such organization is Consolidated Credit Counseling Services of Canada.

A senior official there told me payday lenders sometimes waive payment of all accumulated interest, in return for the money initially loaned to the client.

But for the vast majority of payday loan customers, the obscenely high interest rates that are out of line with other forms of credit remain a fact of life.



January 22, 2015 at 09:41:12

Typical, people who dislike payday loans really do like talking about the "annual interest rates" and claim that they are outrageous. Of course they seem to be when you put it like that, but the thing people are missing is that a payday loan is meant to be a small short term loan. You simply cannot describe an annual interest rate for a loan that it intended to be a (hopefully) one time thing. Like it or not, these loans are helpful to a lot of people who have a poor credit history and are unable to obtain credit elsewhere, and if used properly they do not have to put you into a spiral of debt.

Barry McKay

July 12, 2013 at 16:53:57

And now We have a new boy Wonga moving into town. This UK company came under severe criticism for its rapacious loans ( they were charging up to 6000% annual interest) and yet - as in Canada - it was all within the law. All I can say is "Buyer Beware". Unfortunately the buyer doesn't often read OBJ or similar publications. Maybe they should be required reading in Canadian high schools?


June 24, 2013 at 11:48:28

I disagree with Richard. These are really exorbitant rates of interest, and the yearly cost is extremely high as the article states. I have a nagging feeling that Richard is part of the payday industry to defend it so vehemently.

Richard Joseph

May 29, 2013 at 13:10:02

Your article is very misleading, in fact. It clouds the issue, not clarifies it. Someone who goes in to borrow $200 knows they have to pay back $242. $42 is the 'true' cost of a payday loan. It is ridiculous to apply an Annual Percentage Rate to a short term loan. When you talk about about payday loan customers and 'other forms of credit' the fact of life is that no one else will give them credit, which is why the have to turn to a payday lender. A payday loan is high risk for the lender, which is why the fee is high. It is common sense and appropriate business practice. Stop slamming payday loans and start looking at the real problem, which is financial exclusion by the banks.


Richard. you must be a spoke person for those loan sharks. Pay day loan companies are taking advantage of the most vulnerable segment of our society. What ever happened to the law that states loan sharks are illegal? It's high time the government re address this issue and close down these thief's.

Thank you for clarifying this! I think most of the people taht use this service do not know how much they are being charged All of you who are using these stores, you are being taken advantage of! Be careful and manage your finances and you will end up saving a lot of money.

Category: Payday loans

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