Board Calls For Cap on Payday Loans

Saturday, 07 February, 2009

Ontario should cap the cost of payday loans at $21 for every $100 borrowed and review that limit in two years, an independent advisory board has concluded. But the short-term loans - which critics say rip off consumers with sky-high interest rates - should not be available to everyone, the group said yesterday in a report to the Liberal government.

Payday loans should only be granted to consumers who can "realistically" be expected to pay them back on time, it said. Loans shouldn't be advanced to welfare recipients, for example, because they are too risky to both the borrower and the lender, it added.

Anti-poverty groups and the NDP have long complained that payday lenders prey on the poor and gouge consumers by charging annual interest rates of up to 800 per cent. However, the board concluded that payday loans are expensive because they're designed as small, short-term loans - not because the industry is earning huge profits.

Even the best payday lenders are making "unspectacular returns," with the average profit margin on a loan hovering around 6.9 per cent, below the 2007 national average of 8.8 per cent for all industries, it said. And research didn't bear out the claim that payday lenders are taking advantage of low-income families, the board said.

Most borrowers are in "financial distress" but loans are generally advanced to those who have jobs, it noted. Many welfare recipients can't get payday loans because most lenders require employment as a condition of granting a loan, it said. It is illegal in Canada to charge more than 60 per cent interest per year, and studies have found that many payday lending companies are charging just under that.

Canadians borrow an estimated $2 billion a year through payday loans. Of the 750 payday loan stores in Ontario, almost half are already lending near or below the maximum amount recommended by the board, according to the Ontario government. But it may be weeks before the government announces whether it will follow the board's advice, said Sarbjit Kaur, a spokesperson for Small Business and Consumer Services Minister Harinder Takhar.

Source: news.guelphmercury.com