Marie Mullally isn’t a woman given to hyperbole. As head of Credit Union Atlantic (18,000 members, $396 million in assets) in Halifax, Nova Scotia, it’s her job to oversee the financial health of the cooperative now — and to ensure that health for generations to come.
Yet, increasingly, Mullally finds herself stewing over the dangerous cycle of indebtedness she sees creeping into the lives of friends, neighbours — indeed, thousands of Canadians across the country.
To make the situation worse, many people in her community turn to payday loan companies, thus adding dangerously to their debt load, because they feel they have no choice.
Easy money has great appeal for people in desperate straits — and more Canadians than ever are using payday loans to access cash. Payday lenders offer unsecured small-sum loans and cheque-cashing services to those who need money in a hurry. Customers can typically borrow a certain percentage of their net pay for up to 14 days, providing little more than a post-dated cheque for principle plus interest and fees dated for their next payday. The average loan sought is $300 for a period of 10 days, according to the Canadian Payday Loan Association (CPLA), an industry advocacy organization.
The true cost of borrowing? A staggering annual rate of 599.64 per cent
Yet there’s one very hefty string attached — staggering borrowing rates. The true price of these loans is often disguised by come-ons that emphasize the dollar cost of borrowing. Typically, ads say something like: “Borrow $300 for two weeks for just $69.” The simple interest rate for that period, 23 per cent, seems not out of line with the rate charged by some high-interest credit cards. But if you convert that 23 per cent to an annual rate by multiplying it by 26.0714 — the actual number of two-week periods in a year — you end up with a simple annual rate of a whopping 599.64 per cent.
Payday lending’s corrosive impact
Mullally worries about the destructive effect payday loans have on society when so many people are living beyond their means. “I don’t want to overstate it,” she says, making her point in a steady, though impassioned voice. “But the impact of financial stress on a family, on a society, on a community — it’s significant.”
Her comments come as Credit Union Atlantic (CUA) joins credit unions from coast to coast in a renewed focus on payday lending and finding a sustainable alternative to a business that many consider predatory. The discussion has been on the burner for years, ever since the mid-1990s when Cash Money, Money Mart, Quick Loan, Money Shack and other such storefront lenders set up shop in Canada’s small towns and cities. Today, an estimated 1,400 payday loan outlets operate nationwide and some two million Canadians make use of their services annually.
A challenger to payday loans
In 2014, Vancity (509,000 members and $18.6 billion in assets) turned up the heat on that long-simmering conversation with the introduction of the Fair & Fast Loan™, becoming one of the only financial institutions in North America to challenge the payday industry. Executives with the Vancouver-based credit union say they are confident they’ve struck on a product that gives at-risk members the help they need now, while moving them towards greater financial stability.
Members can borrow any amount from $100 to $2,500 and be approved in about an hour. Borrowers are charged 19 per cent annual interest and given up to two years to pay the loan back. That means if a member borrows $300 for the minimum term of two months and pays it off after two weeks, the loan would cost $2.20, which adds up to 19 per cent interest annually. For the same amount, a payday lender in B.C. would charge the borrower $69 ($23 per $100), or 600 per cent annually.
The new loan model is a deliberate effort by Vancity to reduce the cost of borrowing and to help members raise their credit scores. And as word of the credit union’s success with Fair & Fast Loan spreads, calls and emails have come flooding in from organizations and financial services co-ops everywhere, including CUA, which is in the early phases of implementing a similar product for its members. Vancity has proven an obliging partner by sharing its expertise with almost anyone who asks. “I just sat in on a call with a group in Korea,” says Linda Morris, Vancity vice president of business development. “There is a lot of interest because it is a very widespread problem.”
Not everyone agrees that payday loan operators are sharks or usurers. There is a theory that the service is useful — even welcome — in a free-market economy and that all the negative chatter by industry critics is unfair. The reasoning goes like this: Most people who use payday loans can’t borrow from traditional financial services institutions because their credit history puts them in a high-risk category. Others have no bank account or bank history. It’s therefore not surprising, says Louis-Philippe Rochon, associate professor of economics at Ontario’s Laurentian University, that small-sum lending companies have sprung up demanding high rates of interest.
“Markets have a way of creating institutions that respond to a need and this is exactly what has happened,” Rochon points out. “If you are going to be risky, lenders are going to charge a higher rate of interest to compensate for that risk.”
“Markets have a way of creating institutions that respond to a need and this is exactly what has happened. If you are going to be risky, lenders are going to charge a higher rate of interest to compensate for that risk”
—Louis-Philippe Rochon, associate professor of economics, Laurentian University
Payday loan advocates believe the industry has a rightful place in the market. CPLA president Stan Keyes says the private lenders his group represents (roughly 65 per cent of the industry in Canada) follow strict provincial and federal regulations in terms of the fees and interest they can charge customers.
Currently, seven provinces have rules in place that cap the interest these lenders can demand. The scale ranges from $17 for every $100 borrowed in Manitoba to $25 per $100 in Prince Edward Island. Nova Scotia just recently lowered the amount lenders can charge from $25 to $22 per $100 borrowed following an industry review. Ontario is undergoing a similar review process. Borrowing rates in that province are currently set at $21 per $100. Lenders in provinces that don’t have legislation in place to regulate the industry are restricted by federal law from charging more than 60 per cent interest annually on a loan.
Keyes maintains payday lenders are also subject to high expenses and says that’s why the banks and other financial institutions largely don’t offer small, risky loans. He cites a recent Deloitte report written for the Ontario government that revealed, among other observations, that bad debt costs to payday lenders had jumped 53 per cent between 2009 and 2014, from $4.06 to $6.22 per $100 loan. Overall, the report found the total cost of lending had increased by just under $1 per $100 loan over the same five years. “It is quite clear that it is expensive to provide this product,” he says.
As for those alleged social costs, Keyes says that, too, is exaggerated. “Let’s say a person needs a loan to buy food or keep the power on and walks into a bank to ask for $200. The bank will say ‘Sorry. We’re too big to help you out.’ So the borrower goes across the street to a licensed payday lender, receives $200 and is charged $40 for that loan,” he says. “Who’s the bad guy in this scenario?”
Resolving short-term cash crises
It’s true that some kind of service that addresses short-term cash crises is in demand. According to Vancity, which published a report on the payday loan industry earlier this year, about 14 to 15 per cent of Canadians have used a payday lending service in the past or are using one now.
In British Columbia, the number of borrowers has risen nearly 60 per cent from 125,172 in 2012 to 198,003 in 2014. Meanwhile, an estimated 400,000 Ontario residents took out a payday loan last year, representing $1.1 billion to $1.5 billion in value, the report found. Farther east, Nova Scotia estimates that last year 14 payday lenders distributed $89 million in loans to 5,000 residents of that province. Each borrower used the service an average of 13 times over 12 months.
In B.C. the number of payday loan borrowers has risen to 198,003 — nearly 60 per cent from 2012 to 2014
“Clearly it is a large sum of money and a fairly large number of individuals who are participating in these programs, given the size of our province,” says Mullally.
But it doesn’t follow that high demand translates into a need for the service, says Vancity’s Morris – at least not one that is provided by lenders whose only interest is in making a profit. “In the end, it’s all about people being excluded,” she says. There are “more human beings trying to get from paycheque to paycheque … and I don’t think financial institutions have provided the alternatives.”
The Fair & Fast Loan is one such alternative. It came about as a direct result of the credit union’s executive board. A survey in 2013 revealed Vancity’s members were using payday lenders to help them make it through tough economic times. The demographics of borrowers varied, says Morris, who noted a slightly higher use among Millennials and men. (CPLA research shows the reverse: 53 per cent of the people who use payday loan services are women, while 47 per cent are men.)
Vancity is currently participating in a study on lending conducted by researchers at the University of North Carolina, where several Vancity members have agreed to share anecdotes about how they ended up in dire need of fast cash. “The stories are very poignant and very moving – stories about being caught out here or short there: they had a family expense, the car broke down and they need it to get to work. They wouldn’t surprise you,” says Morris.
Many also spoke about the shame of using a payday service and about wanting professional input to help better manage their money. So Vancity recently took steps to lower its lending criteria to allow even more of its members to take advantage of Fair & Fast Loans. In part, says Morris, it can do so because of the size of the credit union. “We are a large organization and we make our dollars in a variety of ways and that allows us to take a risk and perhaps do something different,” she says.
But it’s worth noting that the delinquency rate among borrowers has been low — surprisingly so, given the experiences reported by private lenders. Why the difference?
Morris responds with the story of a woman who came to a Vancity branch carrying three payday loans. A staff member sat down with her and quickly came up with a plan to pay off the lenders and get her moving along a healthier financial path. Recently, the woman returned to the branch with chocolate. “She was just so thankful,” says Morris. “So maybe part of it is, when people are actually well received, have good conversations with lenders, they want to pay the money back.” ◊
Small loan solutions
In addition to Vancity’s offering, other alternatives are popping up or in the works, both at home and abroad.
Churches Mutual Credit Union
Launched by the Church of England, this Brit-based credit union currently offers its 60,000 church workers, clergy and volunteers loans between £250 and £15,000 ($500 and $30,000). Members can repay through a payroll deduction or straight from their bank account.
Loan rates are advertised on the website as “competitive” when compared with similar products on the market. The credit union plans to broaden the criteria to allow church members access.
This online lender bills itself as a “disruptor of debt.” Borrowers looking for small amounts of cash can apply for the MogoMini loan, which offers up to $2,500 in cash at a daily rate of 11 cents per $100 (39.9 per cent APR). The MogoZip top limit is $1,500 for a fee of $10.50 per $100.
State Employees’ Credit Union of North Carolina
Members can get a salary advance at 11.75 per cent annual interest – about 30 times less expensive than a typical payday loan, according to the credit union website. typical payday loan, according to the credit union website. In its 2014 report on financial benefits, the credit union reported a gain of about USD$93 million as a result of the loan program.
The Canadian Union of Postal Workers
Based on the results of a 2014 study of banks and payday lenders in Canada and the U.S., the union determined a need for a postal bank, especially in areas where banks are scarce and payday lenders abound. To that end, the union is pushing to initiate postal banking as a means of offering more people a lower cost-alternative to private lenders. (See: “A Postal Proposition,” Enterprise, May 2015).
A Vancouver-based peer-to-peer lending site that allows borrowers to access loans between $1,000 and $30,000 at rates from 6.3 to 17.5 per cent APR. It takes about three minutes to apply and seconds to be approved, according to the website. ♦