As COVID-19 wreaks havoc on the financial state of Canadians, many are finding themselves strapped for cash. In desperate situations such as these, consumers may be tempted to fall back on payday loans, especially those from lower-income families. The problem is, payday loans are rarely ever the answer in times of financial distress.
Who Typically Uses Payday Loans?
Payday loans are dangerous because they typically attract the most vulnerable in society. These include lone parents, single-female lead households, young families, and families with high debt. In fact, according to Statistic Canada and Acron Canada, we’ve found the following statistics on Canadians who resort to payday loans.
- Single-parent families were three times more likely to use payday loans than couples with no children.
- Single female-lead households were more likely to use payday loans than single male-lead households.
- Young families (ages 15 – 24) were three times more likely to use payday loans than older families (ages 35 – 44).
- Renters were almost three times more likely to rely on payday loans than those with a mortgage.
- Families with a debt-to-asset ratio greater than 0.50 were 3.2 times more likely to use payday loans than families with a debt-to-asset ratio of less than 0.25.
Problems With Payday Loans
As mentioned earlier, payday loans are dangerous, but you may be wondering what exactly makes them so bad?
High-Interest Rates
Cloaked behind its easy approvals and click-bait advertising lies interest-rates so high that a mere 300 dollar loan can turn into thousand dollars of debt that can take years to pay off. In fact, the APR of a payday loan with a fee of $15 – $20 per $100 borrowed is approximately 391% to 521%. To put that into perspective, let’s take a look at a $300 loan with a fee of $17 per $100 borrowed (APR ~ 442%). For the purpose of demonstrating how interest builds quickly with a payday loan, let us assume you were unable to pay back the loan within the 14 days allotted.
Failure to pay will result in a penalty charge of approximately $40 plus interest of $51. Your $300 loan now costs: 300+51+40 = $391. Failure to repay that in the next 2 weeks will result in another penalty ($40) plus interest ($68). Just like that, you owe an extra $200 in just a month’s time. Some Canadians end up using more payday loans to pay off the increasing debt, but as they do, the higher their interest builds and the more they fall into the payday loan cycle of debt.
Targets The Vulnerable
Many Canadians that rely on payday loans are forced to use them out of necessity. According to Acorn Canada, many use payday loans to pay for food, housing, bills, and poverty in general. In fact, according to Statistics Canada over half of the families who used payday loans fell in the lowest 20% of net worth, of which 80% were in the bottom 40%.
Rather than taking out a personal loan that could provide lower interest rates and longer more affordable payments, they opt for payday loans due to a lack of access to credit and alternative lenders. Moreover, they often have little to no savings and no overdraft protection, which also pushes them to rely on expensive payday loans.
With COVID-19 threatening the income of many Canadians, more consumers are going to be strapped for cash, especially those who don’t qualify for government assistance. With so many vulnerable Canadians without assistance, many will likely fall prey to the predatory payday lenders.
Check out the difference between borrowing with a payday loan and a personal loan.
Debt-To-Asset Ratio, Mortgage Payments, And The Connection To Payday Loans
With little to no income coming in, many Canadians are struggling to keep up with their monthly bills. As such, banks have been overwhelmed with the number of Canadians applying for mortgage deferrals, loan deferrals, credit card deferrals, as well as other financial support. Based on the graphic below, it is likely that families with a higher debt-to-asset ratio will need these deferrals and financial support the most as they will be the most inclined to use payday loans in times of financial distress. People with a debt-to-asset ratio above 0.50, were 4.2 times more likely to skip mortgage payments and 3.2 times more likely to take on payday loans than those who have a debt-to-asset ratio of 0.25 or less.
Savings And The Use Of Payday Loans
The threat of COVID-19 is a prime example of how your financial situation can take a turn for the worse due to completely external factors. It’s times like these that an emergency fund can help protect against excessive debt, or at the very least prevent consumers from relying too heavily on high-interest credit products like payday loans. In fact, according to Statistics Canada, those with less than $500 dollars in savings were 2.6 times more likely to rely on payday loans than those who had between $2,000 and $8,000 in savings.
As such, we urge Canadians to always use a budget and save money. It may seem like it’s impossible to save when in debt, but with a budget, it is possible.
What Can Be Done To Help?
With growing financial distress due to COIVD-19, a report by a CCPA political economist and senior researcher says the Government of Canada needs to tighten the regulations around payday lenders including “[axing] interest rates at once and [requiring] banks to offer adequate and inexpensive services to low-income households”. This is a necessary step to protect the most vulnerable Canadians from falling victim to the predatory nature of payday loans.
