Report urges government action against high-cost loans

Advocacy group decries how pandemic's impacts have pushed low- and moderate-income Canadians toward alternative lenders

Report urges government action against high-cost loans

The pandemic’s disproportionate financial impact on low- and moderate-income Canadians have catalyzed a disturbing new trend of high-cost loan usage, according to a new report.

In the new paper, membership-based advocacy organization ACORN Canada noted that while the pandemic’s impact continues for certain sectors of employment, government support programs are being wound down or replaced with ones that have a much narrower scope.

Against that backdrop, low- to moderate-income Canadians are approaching non-bank lenders and taking on high-cost loans – which ACORN defined to include payday loans, title loans, and instalment loans – to make ends meet.

“In the past, ACORN Canada has secured stronger payday loan regulations at provincial and municipal level,” the report said. “Recent years have seen a disturbing trend whereby payday lenders are increasingly offering installment loans which are larger loans over a much longer period.”

High-cost loans, according to the group, typically have an annual interest rate of more than 30%. Legally, lenders are allowed to charge an annual interest rate of 60% plus insurance, fees, and other expenses on installment loans, it said.

To further offer a better analysis of this trend, ACORN conducted a survey between November 2021 and January.  A total of 440 persons took part in the survey, with 113 saying that due to the pandemic, they were forced to take out a high-interest loan. The findings on high-cost loans were based on the responses of those 113 people.

In addition to the poll, in-depth research was conducted. Conversations were undertaken with a few people who demonstrated an interest in sharing their experiences.

“Not only did the pandemic severely [impact] people’ financial situation, but many people continue to rely on financial support. Worse still, a lot of people do not see their financial situation getting better,” the report said. “Most people expressed concern with the federal support ended or winding up.”

Among the different types of high-cost loans used, payday loans were the most common. Installment loans, meanwhile, were on the rise, with a nearly equal proportion of people using them. People are compelled to take these loans for a variety of reasons, including meeting basic necessities such as rent, groceries, and car repairs, to name a few.

“[W]hile almost 40 percent of respondents mentioned taking loans one or two times, a quarter of respondents stated that they took loans 10 or more than ten times,” ACORN said, arguing that high-cost lenders’ aim is not to help people, but to ensure that the borrowers they lend to get trapped in “a vicious cycle of debt.”

Unfortunately, high-cost lenders continue to take advantage of people's weaknesses by not fully disclosing the cost of borrowing, issuing loans under the guise of increasing credit score, or attaching insurance to the loan to get more money, the report said.

The majority of people who went to such lenders first went to a traditional banking institution before going to a payday lender, the report said.

“Urgent action is needed by the government to provide or enhance people’s access to fair banking,” ACORN said.

It called for several measures including lowering the criminal interest rate on instalment loans from 60% to 30%, with the maximum rate including any associated lending costs such as fines, fees, penalties, and insurance.

The group also asked that the government mandate banks to provide affordable loans for low- to moderate-income people, which would be back-stopped by the Canadian government. Banks must also lower their NSF fees from $45 to $10, the report added.