The 'overwhelming burden' of a payday loan cycle
The proportion of insolvent borrowers using payday loans in Ontario is on the rise, according to a new report, which revealed four in 10 insolvencies last year can be traced back to the costly type of loan.
The number of consumer insolvencies in the province that involved payday loans – which typically come with extremely high interest rates – rose to 37 per cent in 2018 from 32 per cent in 2017, the survey by insolvency trustee firm Hoyes, Michalos & Associates Inc. revealed Tuesday.
The report said insolvent borrowers are also three times more likely to use payday loans, which Hoyes Michalos defines as loans from any company offering fast approval, instant cash, high-interest loans with no or little credit check, than they were in 2011, the first year the survey was conducted.
The rising use of payday loans comes despite recent legislative changes in Ontario designed to reduce consumers’ borrowing risks.
As of July 1 payday loans have been capped at 50 per cent of the borrower’s net pay and lenders are required to offer an extended repayment period if borrowers take out three loans within 63 days. The cost of payday loans were also lowered as of Jan. 1, 2018 to $15 for every $100 borrowed.
The average insolvent payday loan borrower now owes $5,174 in payday loans on an average of 3.9 different loans, according to the report.
"Regulatory changes to lower the cost of payday loans and lengthen the period of repayment are not working for heavily indebted borrowers who feel they have no other option but to turn to a payday loan," one of the firm’s co-founders, Ted Michalos, said in a release. "And the industry itself has just adapted, trapping these consumers into taking out more and even bigger loans, adding to their overall financial problems."
The size of an average individual payday loan has also increased, climbing 19 per cent to $1,311 in 2018 from a year earlier, the report said. And in 2018, 15 per cent of all individual payday loans were for $2,500 or more, up from barely one per cent in 2011.
"The problem is payday loans have changed,” the firm’s other co-founder Doug Hoyes said in a release. “Payday lenders have gone online, making access easier and quicker.”
The report also found young indebted Ontarians are the most likely age group to use payday loans. Nearly half (48 per cent) of insolvencies for consumers aged 18 to 29 involved payday loans, while only 21 per cent of consumers 60 and older used that type of loan.