FCAC Releases Consumer Report on Payday Loans | October 2016By Caitlin in Money
The following information, statistics, and quotes are all accredited to the Financial Consumer Agency of Canada’s report, Payday Loans: Market Trends.
Tuesday, October 25, 2016, the Financial Consumer Agency of Canada released a report detailing its finding on the state of payday lending and borrowing in Canada. In their report, The FCAC explains that they have “been tasked with raising public awareness about the costs of, and alternatives to, payday loans.” We definitely support this, awareness and education surrounding payday loans needs to be taken more seriously as, to be quite frank, what the FCAC has found is not good (click here to read about your rights as a payday loan user). The number of Canadians who are taking on payday loans is increasing and a percentage of those individuals are unaware of the true cost of these types of predatory loans.
What is a Payday Loan?
Before we dive more deeply in the FCAC’s report, let’s take a look at how they define payday loans and the payday loan industry.
- Payday loans are short-term loans, typically with a value of no more than $1,500.
- They are provided by a “non-traditional financial service provider”, this means that banks and other traditional lenders do not offer payday loans.
- The purpose of a payday loan is to help the borrower through a financially difficult time.
- The loan must be repaid by the borrower’s next payday, typically within two weeks.
- The cost of taking on a payday loan (or the interest rate) is a set amount per every $100 borrowed. For example, $21 for every $100 borrowed. This means that a consumer who takes out this type of payday is agreeing to an annual interest rate of 546%.
- The maximum allowed cost of a payday loan varies from province to province.
- Borrowers who are unable to repay their payday loans will be charged even more fees, thus making their loan even more expensive.
As a side note, more often than not, consumers who taken on payday loans become caught it what is called the payday loan cycle. Consumers become unable to repay their first payday loan and must take on another to repay the first. This cycle and go on for weeks and months if not years.
Click here to check out our infographic on the payday loan cycle.
The FCAC’s Findings
It’s important to mention that the FCAC surveyed 1500 payday loan users who had taken out a payday loan within the past 3 years. The following findings are based on the answers that these 1500 consumers gave to a 63 question online survey.
Slightly less than half of the surveyed payday loan users were unaware of exactly how expensive payday loans are compared to other alternative lending options.
- According to the FCAC, 43% of payday loan borrowers did not know that payday loans are the most expensive form of borrowing.
- Suggesting that these borrowers do not have access to suitable information about the payday loan industry.
- More than 60% of payday loan borrowers reported that they do not have access to credit cards. 88% reported that they do not have access to a line of credit.
- This suggests that either these borrowers are unaware of the types of funding available to them, or they are unable to get approved for a credit card or line of credit.
Slightly less than half of the surveyed payday loan users reported that they took on payday loans to cover necessary expenses.
- 45% of payday loan borrowers reported that they needed to use these types of loans to cover unexpected but still necessary expenses.
- The FCAC’s report provides car repairs are an example of an unexpected but necessary expense. Other examples may include medical bills, house repairs, weather damage etc.
- While 41% of payday loan borrowers reported that they need to use these types of loans to cover necessary and expected expenses.
- The FCAC’s report provides utility bills as an example of an unexpected but necessary expense. Other examples may include rent, car payments, groceries etc.
- The survey also concludes that payday loan borrowers are often less likely than the general population to have enough savings to cover these necessary expenses and that’s why they must turn to payday loans.
Finally, the FCAC notes that payday loans borrowers are not always part of the low-income demographic.
- More than 50% of surveyed payday loan users had an annual household income of less than $55,000.
- But, 20% of surveyed borrowers reported that they have an annual household income that exceeded $80,000, with 7% of them reporting their annual income to be over $120,000.
- More often than not we like to assume that the payday loan industry preys upon low-income earners and they do. But it’s clear from this survey that anyone in need of financial assistance, no matter that their income is, can feel desperate enough to turn to payday loans.