A new report published by the advocacy organization ACORN calls on the federal government to reduce the legal cap on interest rates for installment loans to 30 percent.
A recent analysis underlines the impact that high-priced loans had on low-income borrowers during the pandemic. The paper points to examples of people sliding into “vicious cycles of debt” as they fought to afford the ever-increasing cost of their bills.
ACORN, a non-profit organization that advocates for Canadians with low and moderate incomes, published the report on Thursday. This comes at the same time that the organization is renewing its call for the federal government to reduce the legal limit for interest rates on installment loans from 60% to 30%. Currently, the limit is set at 60%.
Payday loans are short-term, smaller loans with exceptionally high annual interest rates. The poll of 113 ACORN members who had gone to high-cost lenders such as Money Mart, Easy Financial, and Cash Money found that a substantial proportion of those ACORN members had turned to payday loans.
However, a significant number of individuals also took out installment loans, which are repaid in installments over a longer period of time. These individuals borrowed anywhere from $1,500 to $15,000 at interest rates that might reach as high as 60% annually.
Donna Borden, a leader inside ACORN and a spokeswoman for the organization in regards to predatory loans, stated that “this should be a priority and the government should move on this, and fast.”
Borden pointed out that 46% of respondents to the poll admitted that they had taken out installment loans of up to $15,000; this represents an increase from the time before the epidemic and is a trend that Borden referred to as “alarming.”
In an email sent out on Wednesday, Adrienne Vaupshas, press secretary for the Minister of Finance, stated that “the administration is dedicated to cracking down on predatory lenders by decreasing the criminal rate of interest.”
She stated that “in due time” additional information regarding a consultation procedure pertaining to the subject would be released.
ACORN is calling on the government to reduce the fees that are charged to customers of mainstream banks when those customers have insufficient funds to cover a transaction in order to improve access to financial services. In addition, ACORN is requesting that people be offered more low-cost borrowing options by mainstream banks. On March 31, the organization is going to organize a national day of action regarding the subject.
A participant in the ACORN survey named Laura Pellacani had to take out a loan in the amount of $2,500 just prior to the pandemic in order to pay for the cost of airfares back to Canada for her children, who were traveling with their father in another country at the time. She estimated that the loan’s high interest rate would require her to make payments of approximately $6,000 over the course of the loan’s five-year term.
“I had no alternatives with banks,” she said in an interview with the Star, noting that as a result of her poor credit, she has been unable to obtain a conventional bank loan or credit card. “I had no options with banks,” she said.
Pellacani, who is eligible for ODSP, used to supplement her income by working as a dog walker; however, after the onset of COVID-19 and the fact that all of her customers stayed home with their animals, she was unable to find any new clients.
She has only been able to pay off $500 of her debt, and she routinely uses payday loans to assist her in meeting her financial obligations. Pellacani stated that she is having trouble affording groceries despite the fact that she receives a monthly supply of food from a food bank. This is due to the fact that the cost of food is continually rising.
She often finds herself in a position where she is obliged to borrow a little bit more each month, and she likens the process of getting payday loans to a loop that never ends.
According to what she claimed, “payday loans target impoverished people who struggle in day-to-day living and live paycheque to paycheque.”
The interest rates on payday loans are not restricted in any way by provincial legislation, and lenders are not even required to adhere to the 60% cap on annual percentage rates. Payday lenders in the Canadian province of Ontario, for instance, have the ability to charge $15 in interest for every $100 borrowed over a period of two weeks, which results in interest rates that can reach up to 390 percent annually.
Chrystia Freeland, the Minister of Finance, received a mandate letter from Prime Minister Justin Trudeau in December, in which he asked her to “hard down on predatory lenders by lowering the criminal rate of interest.”
In an emailed statement, the Canadian Consumer Finance Association, which represents lenders such as Money Mart, Cash Money, and Cash 4 You, stated that a reduction in the legal interest rate could actually be detrimental to some borrowers because it would prevent them from gaining access to any form of financing.
The Canadian Consumer Finance Association (CCFA) stated that installment loans have a high risk and are expensive to supply. They also mentioned that a borrower’s credit score is an important element in deciding the interest rate that is paid on such loans.
The Canadian Consumer Finance Association (CCFA) stated that any change to the government maximum interest rate will result in the withdrawal of access to credit for those Canadians with lower credit scores who previously qualified at the existing rate. “The federal government should not take any action that either result in the denial of credit to Canadians or push borrowers to access credit through illegal unlicensed lenders,” the statement reads.
In a recent financial report, Easy Financial, a publicly-traded company that does not offer payday loans but does offer other kinds of alternative credit, stated that 8.2 million Canadians have “non-prime” credit scores of less than 720, which indicates that a large number of them are unable to obtain credit from banks or other traditional lenders.
It is estimated that these Canadians, who it refers to as its “target market,” carry a total credit amount of 186 billion dollars altogether.