Who takes out pay day loans in Canada?

20 Dec

Pay day loans have been criticised for targeting the poorer people in society and for trapping them in a cycle of debt.  However, is this criticism justified?  Who in Canada takes out pay day loans and how often?

In early 2005, the Financial Consumer Agency of Canada did a survey.   They found that the people most likely to take out a pay day loan were men, between the ages of 18 and 34 years, urban residents living in British Columbia, Alberta, Saskatchewan and Manitoba, with household incomes of less than $30,000 per year and those with some post-secondary education.

Only 7% of people who used the loans said they did so due to poor credit history or bankruptcy (so most applicants would have been able to get a loan elsewhere).  The main reasons given for borrowing by way of a pay day loan was the ease of it: taking into account fast need for money and the convenience.  53% of those surveyed said this was the reason why they had used a pay day loan.

It is true that pay day loans are quick and simple.  Taking a look at an example lender like http://www.wonga.ca shows that the application process can take less than 15 minutes.  Therefore it is hardly surprising the speed attracts the consumer.

So how often do people use pay day loans?  48% of those surveyed said they used them only once a year.  Therefore these loans are hardly being used by the masses on a frequent basis.

Together with consumer protection laws the following have been suggested would lead to a decrease in the need for such loans: Government-led financial literacy education programs; promotion of competition from traditional lenders like banks; reforms to make the process of bank closure in low-income and rural neighborhoods more onerous and Government aid for the establishment of community banking operations in low-income Canadian neighborhoods.

The proposition that competition would lead to a decrease in pay day lenders is interesting.  Common sense would suggest this is more than likely to be true.  However, it seems that many traditional financial institutions are not interested in providing short term loans.   It must be kept in mind that the higher rates of interest and charges imposed by a pay day lender are there for a reason.  Yes, of course the lender wants to make money – it is a business after all.  However, it is also the case that a lender needs to cover the costs of the administration in providing the loan.   It needs to be kept in mind that banks dealing with longer term loans have more time in which to collect interest to cover administration fees (and may also charge a fee).   If banks were to provide such loans they probably would be on a similar basis to those provided by the industry already. Lending needs to make business sense – traditional lenders probably do not want to be burdened with the administrative costs.   Adding traditional lenders may also have the reverse effect of making pay day loans even more accessible and thus increasing use.

The best course of action when it comes to pay day loans is very much the source of much debate – ban them or over regulate them and a lending resource that many find useful or necessary may die.  The industry serves people who need a loan and fast.  What will people do if the industry did not exist?  Missing a bill payment may have a higher penalty than the charges and fees imposed by a responsible pay day loan lender.

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