Payday loans are quickly becoming a hot topic all over Canada.
Earlier this week, it was reported that a growing number of Canadian consumers are turning to payday loans. According to the Financial Consumer Agency of Canada (FCAC), a federal consumer watchdog agency, four percent of Canadian households have taken out a payday loan in the past 12 months.
The FCAC also found that many payday loan customers are unaware of the specifics and details, and were unaware that cash advances on credit cards are cheaper than payday loans.
“High household indebtedness and low levels of consumer savings, particularly the absence of a household emergency fund, make a payday loan a solution for many consumers despite their very high cost,” said Jane Rooney , financial literacy leader at the consumer agency, in a statement.
Despite the negative publicity that the payday loan industry has gotten, a new report suggests that these alternative financial products provide a “necessary service for cash-strapped Canadians.”
The Conference Board of Canada published the results of a new research report that took a look inside the payday loan industry. Officials concluded that short-term, businesses offering high-interest online payday loans provide an array of benefits for Canadians who do not have access to traditional banking options and forms of credit.
Entitled “Filling the Gap – Canada’s Payday Lenders,” researchers did note that provincial and municipal rules and regulations do establish “safeguards” to shield households and consumers from unscrupulous payday lenders. The legislation that is currently in place prevents exploitation from transpiring.
However, even more regulation is not required. Instead, consumer education is a better approach to take rather than piling on more rules that puts the most vulnerable at a greater disadvantage.
“A public policy approach favoring consumer education is advised,” the Conference Board of Canada wrote in its report. “Distinguishing licensed online payday loan lenders from illegal lenders would be a critical step towards protecting the financial welfare of Canadian payday loan borrowers, and deterring the growth in unscrupulous, unregulated channels.”
In addition, the report alluded to the industry’s positive impact on the national economy.
The Conference Board of Canada employs nearly 7,000 full-time jobs and offers total salaries of close to $300 million. Therefore, over-regulating licensed payday lenders would harm Canadians and workers.
In 2014, the licensed payday loan industry in Canada extended approximately 4.5 million short-term loans to Canadian households. This represents a total value of $2.2 billion. Are these borrowers entering into endless debt cycles? Not quite. Eighty percent of payday loan users, the report notes, borrow a maximum of two times per year.
Tony Irwin, president of the Canadian Payday Loan Association, is pleased with the findings in the report, arguing that payday loans are a vital tool for Canadians across the country.
“The Canadian Consumer Finance Association agrees with the Conference Board of Canada that a focus should be to increase financial literacy among Canadians, and our member companies continue their efforts in this consumer education,” he said in a news release.
In multiple provinces and municipalities, officials are trying to rein in the industry by reforming what they charge, how they charge and where they can operate.