More low-income Canadians took out installment loans during the pandemic — and faced interest rates of up to 60%
A new report highlights the impact high-cost loans have had on low-income borrowers during the pandemic, pointing to examples of people falling into ‘vicious cycles of debt’ as they struggle to cover the rising cost of bills.
The report released Thursday by ACORN, which advocates for low- and middle-income Canadians, comes as the non-profit group renews its call for the federal government to lower the legal limit on interest rates on installment loans. at 30%, down from 60 percent.
The survey of 113 ACORN members who turned to high-cost lenders such as Money Mart, Easy Financial and Cash Money revealed that a high proportion turned to payday loans, short term and smaller with extremely high annual interest rates.
But many have also taken out installment loans – which are repaid in installments over a longer period – borrowing $1,500 to $15,000 at annual interest rates of up to 60%.
“This should be a priority and the government should act on it, and fast,” said Donna Borden, ACORN leader and predatory lending spokesperson.
Borden noted that 46% of survey respondents said they had taken out installment loans of up to $15,000, an increase from before the pandemic and a trend she called “alarming.”
“The government is committed to cracking down on predatory lenders by lowering the criminal interest rate,” Adrienne Vaupshas, the finance minister’s press secretary, said in an email on Wednesday.
She said further details of a consultation process on the matter will be available “in due course”.
To improve access to financial services, ACORN is also calling on the government to require traditional banks to offer more low-cost borrowing options to individuals and to reduce the fees charged when customers do not have sufficient funds to hedge a transaction. The group is planning a national day of action on the issue on March 31.
Laura Pellacani, who took part in the ACORN poll, had to take out a $2,500 loan just before the pandemic hit to cover the cost of flights back to Canada for her children, who were overseas with their father. Due to the high interest on the loan, she said she would have to spend around $6,000 to pay it off over five years.
“I had no options with the banks,” she told The Star in an interview, explaining that due to bad credit she couldn’t get a bank loan or a credit card. .
Pellacani, who receives ODSP benefits, used to earn extra income as a dog walker, but the job dried up when COVID-19 hit and her clients were all home with their pets of company.
She was only able to pay off $500 of her debt and regularly uses payday loans to cover her bills. Even with a monthly food bank delivery, Pellacani said she struggled to pay for groceries as the cost of food rose.
Often forced to borrow a little more each month, she compares payday loans to a cycle that doesn’t stop.
“Payday loans target poor people who are struggling in day-to-day life and living paycheck to paycheck,” she said.
Payday loans are regulated by provincial governments and lenders are exempt even from the 60% limit on interest. In Ontario, for example, where payday lenders can charge $15 in interest for every $100 over a two-week period, annual interest rates can reach 390%.
In a December mandate letter, Prime Minister Justin Trudeau asked Finance Minister Chrystia Freeland to “crack down on predatory lenders by lowering the criminal interest rate.”
The Consumer Finance Association of Canada, which represents lenders such as Money Mart, Cash Money and Cash 4 You, said in an emailed statement that the reduction in the legal interest rate could actually hurt some borrowers. cutting off all access to funding.
Installment loans are high risk and expensive to provide, the CCFA said, noting that a borrower’s credit rating is a key factor in determining the interest rate charged on such loans.
“Any reduction in the maximum federal interest rate will result in the removal of access to credit for Canadians with lower credit scores who previously qualified at the current rate,” the CCFA said. “The federal government should take no action that would deny credit to Canadians or force borrowers to access credit from illegal, unlicensed lenders.
Easy Financial, a publicly traded company that does not offer payday loans but does offer other types of alternative credit, said in a recent financial report that 8.2 million Canadians have “unpreferred” credit scores. » below 720, which means that many of them cannot access credit from banks or traditional lenders.
He estimates that these Canadians, whom he calls his “target market,” collectively have a credit balance of $186 billion.