Licensed Canadian Payday Lenders Provide Needed Credit to At-Risk Borrowers

OTTAWA, Oct. 25, 2016 /CNW/ - Despite the stigma associated with payday loans, the industry provides a valuable service to a specific clientele of Canadians. A new report by The Conference Board of Canada estimates that the licensed Canadian payday loan industry provided nearly 4.5 million short-term loans to Canadian households, valued at $2.2 billion. Given these findings, improving financial literacy education is critical to ensure that Canadians are making the best financial decisions possible.

"The licensed payday loans industry provides a necessary service for cash-strapped Canadians who lack access to alternate sources of credit in times of need," said Pedro Antunes, Deputy Chief Economist. "When considering increasing regulatory requirements on the industry, policymakers should recognize the different types of payday loan consumers and be mindful of restricting credit access to a financially vulnerable segment of the population."

HIGHLIGHTS

• In 2014, the licensed Canadian payday loan industry provided nearly 4.5 million short-term loans to Canadian households, valued at $2.2 billion.
• There are two distinct categories of payday loan clients, each of whom have differing reasons to use the service.
• Without access to licenced payday loan providers, clients could turn to unregulated providers or illegal online lenders.
• In addition to considering appropriate regulations, better consumer education would be a critical step in protecting the financial welfare of Canadian payday loan borrowers.

The millions of short-term loans provided by the payday loans industry in 2014 alone generated 6,930 full-time equivalent jobs for the Canadian economy and a represented $273 million in salaries. Projecting this demand to 2016 means that the licensed payday lending industry in Canada will issue nearly 6 million loans to households this year at a value of $3 billion.

The payday loan consumer base comprises two distinct categories of clients with widely divergent needs:

• "ALICE" ("asset-limited", "income constrained", and "employed")—this customer relies on payday lending to cover the cost of periodic unexpected expenses and ongoing necessities. These individuals are likely to use payday lenders because they may not be able to get consumer credit through conventional financial channels.
• "ARTI" (asset rich, temporarily illiquid)—this customer is more economically stable, but uses payday loans as interim financing to cover unexpected expenses.

Government policies regulating payday loans need to take into account the needs of these two types of clients. Provincial legislation governing the licensed payday loans industry in Canada already provides considerable safeguards against exploiting customers. In addition, legislated fee ceilings on licensed payday loans appear broadly consistent with the cost structure of the licensed payday loans industry in Canada.

Policymakers are urged to exercise caution in contemplating reductions in provincial maximum fees. Given the cost borne by payday lenders due to high default rates, fee caps could make the business uneconomical if set too high. Without access to licenced payday loan providers, clients could turn to unregulated providers or illegal online lenders.

A critical step in protecting the financial welfare of payday loan clients is consumer education, which could help users identify licensed online payday loan lenders and avoid illegal lenders. In addition, improving financial literacy is critical to ensure that consumers are able to correctly identify interest charges on payday loans and are making the best financial decisions possible.

The report, Filling the Gap—Canada's Payday Lenders, was undertaken by The Conference Board of Canada for the Canadian Consumer Finance Association.

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SOURCE Conference Board of Canada

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