Being poor is expensive. Between overdraft fees, ATM charges, and credit card interest, big banks and predatory lenders benefit from low-income Canadians.
Recognizing the pandemic is far from over and its effects will remain long-lasting, advocacy organization the Association of Community Organizations for Reform Now (ACORN Canada) completed a study detailing how high-cost loans (like payday loans, installment loans, and title loans) exploit low-income Canadians in a time of record inflation and great economic uncertainty on a global scale.
ACORN compiled a survey between Nov. 2021 and Jan. 2022, gaining insight about the harms and consequences of predatory lending from 440 people who have experience with taking out high-interest loans. One in four of those individuals said they were driven to predatory lenders due to financial strain from the pandemic.
The 52-page report, a combination of data and testimonials, found that more than two years into the COVID-19 pandemic, “a lot of people do not see their financial situation getting better.” An overwhelming majority of participants “expressed concern” with pandemic benefits like the Canadian Recovery Benefit (CRB) coming to an end or being more exclusive.
The report laid out the many ways lenders exploit the vulnerabilities of clients, from not fully explaining the cost of borrowing to “offering loans on the pretext of improving credit score or attaching insurance to the loan to extract more money.” ACORN concludes that banks are failing the same people who need their services most, noting that the majority of clients relying on payday loans were initially rejected from banking institutions. Not only are those living on low-incomes often denied bank loans, they are also charged excessive nonsufficient funds (NSF) fees, at an average of $45. That’s in addition to late charges and hidden fees from predatory lenders.
The report also documented a concerning trend: while payday loans remain the most common type of high-cost loan, “installment loans continue to see a rise with almost equal proportion of people reporting taking out an installment loan.”
Installment loans appear attractive to borrowers, as payments are spread out over a longer duration of time, but ACORN’s report suggests these loans also bring long-term financial suffering to individuals trying to make ends meet.
Less than half of respondents, or 40 per cent, indicated they relied on high-interest loans “one or two times,” while one in four took out ten or more loans.
“This reveals the exploitative nature of high-cost lenders as the objective is not to help people but ensure that the person who took out a loan gets trapped in a vicious cycle of debt,” the report reads. “The reasons for which people are forced to take these loans are to meet basic expenses such as rent, groceries, car repairs etc.”
Part of ACORN Canada’s recommendations would see a Fair Credit Benefit created by provincial or federal governments to help people in financial emergencies, providing an alternative to predatory payday loans. The organization also wants the interest rate of installment loans reduced from 60 per cent to 30 per cent. That includes all fees, charges, and insurance.
In 2017, More than 6 million Canadians were paying off installment loans up to $15,000 with interest rates as high as 59.9 per cent (the federal cap is 60 per cent).
One of the report’s case studies documented the experience of Donna Borden, who borrowed $10,000 from CitiFinancial in 2003 after being denied a consolidation loan by her bank.
“After 7 years, Donna had paid $25,000 in interest and still owed $10,000,” the report reads. “She was misled into getting $2,600 in insurance on a $10,000 loan and then also paid interest on the insurance. The lender also changed Donna’s loan terms several times without telling her and charged her a number of refinancing fees.”
Back in 2019, ACORN sent a written submission to the House of Commons ahead of that year’s budget. Among their three recommendations were providing a $10 per month internet plan for low-income Canadians, modernizing the Employment Insurance system, and to make banking safer by ending predatory lending.
That report noted nearly one in two Canadian workers live paycheque to paycheque, with millions of workers “one unexpected expense” away from “spiraling debt.”
Earlier this month, Nova Scotia’s Utility and Review Board (UARB) reduced the maximum cost of borrowing for payday loans in the province from $19 to $17 per every $100. That amount will drop further to $15 per $100 on Jan. 1, 2024. The new regulations, set to take effect on Sept. 1, will also see the maximum interest rate charged on default outstanding balances reduced to 30 per cent. That’s still more than five per cent higher interest than the average credit card company.
“Despite numerous letters of comment asserting that the payday loan industry be ‘shut down’ in Nova Scotia or that the maximum cost of borrowing be significantly reduced, the Board remains mindful that both the federal and provincial governments have legislation in place allowing lenders to offer payday loans to the public,” the UARB’s report reads.
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