Since 2009, the number of Canadians using payday loans has more than doubled. Today, roughly four percent of households across the country use short-term, high-interest loans, says a new study by the Financial Consumer Agency of Canada (FCAC).
According to the FCAC report, companies offering payday loans online have become very popular over the past several years because they provide cash-strapped customers with quick access to cash. And with many Canadians with poor credit ratings, they can borrow hundreds of dollars from payday lenders.
The FCAC says, unfortunately, many of these payday loan customers are unaware of the high costs involved with these alternative financial products. The federal consumer watchdog agency revealed that fewer than half of the 1,500 payday loan users did not know that these products are more expensive than a cash advance on a credit card because of interest rates as high as 500 percent on an annualized basis.
Moreover, many of the payday loan users are low- to moderate-income earners. However, a considerable number are payday loan clients with incomes of at least $120,000: seven percent.
With these results in hand, the FCAC has pledged to enhance its consumer education material. It will also collaborate more closely with provinces to generate awareness about the high costs of payday loans.
“Payday loans are an expensive way for consumers to borrow money,” said Lucie Tedesco, FCAC commissioner, in a statement. “The uptake of these short-term, high-cost loans has more than doubled in Canada recently, to four percent of Canadian households. This is, in my view, a trend that merits more attention. As a result of this study, FCAC has bolstered its consumer education material and has committed to working closely with the provinces and territories to raise awareness about the high cost of this form of credit.”
Jurisdictions across the Great White North have been working diligently to reform the payday loan industry and establish restrictions to ensure the most vulnerable are protected from the so-called debt traps.
But is it any wonder that more Canadians are using payday loans?
For the first time in its history, the level of debt held by Canadians exceeded the nation’s gross domestic product (GDP). Statistics Canada reported last month that personal debt to GDP reached 100.5 percent in the second quarter.
Canada’s household debt is one of the highest in the world. And a majority of the debt binge can be related to the skyrocketing real estate prices found in cities like Toronto, Vancouver and Montreal. When you add historically low interest rates by the Bank of Canada (BoC) into the mix, you have a populace that has a ferocious appetite for debt.
Jane Rooney, financial literacy leader of the FCAC, warned that single-digit national savings rates and a paucity of emergency funds “make a payday loan a solution for many consumers despite their very high cost.”
Simply put: debt is the biggest issue facing Canadians today. Studies have shown that just a 25-basis point rate hike could negatively impact nearly one million Canadians. When this happens you know the country has a debt problem.