Will education solve the indebtedness attributed to payday loans? One group suggests it won’t.
A new Financial Consumer Agency of Canada (FCAC) study has found that four percent of Canadian households are using payday loans, and 90 percent of those households are doing so to cover crucial expenses or to avoid lay payment fees. In other words, payday loans are vital to consumers.
The FCAC lauded current regulations in place, at the federal and provincial level, but noted that proposed legislation that would apply new rules to the industry would hurt the most vulnerable. Instead, researchers say that more consumer education is needed, not more regulations. It cited, for instance, the fact that nearly half of payday loan users were unaware that these short-term, high-interest products were more expensive than taking out a cash advance on a credit card.
Researchers concluded that payday loans are critical to low- and moderate-income households, and that by instituting even more regulations it would hinder their ability to pay for bills and unforeseen events.
But one organization says that education alone is not enough to protect the impecunious in Canada.
Cardus, a North American think tank dedicated to the renewal of social architecture, released a report entitled “Bank on the Margins.” It explained that it believes FCAC’s intentions to be admirable, but not enough to shield the impoverished and financially destitute from payday loan exploitation.
“The FCAC’s focus on educating Canadian consumers about payday loan costs is laudable,” said Brian Dijkema, Cardus Program Director of Work and Economics, in a statement. “But that will make a limited difference since many payday loan users are in desperate situations and financial alternatives simply aren’t available to them.”
Rather than simply education consumers, Cardus researchers alluded to several solutions:
Pass a similar law that Colorado adopted in 2010 that requires all payday loans to be repayable over a period of six months, come with new fee structures to and offer no penalty for paying back a payday loan early.
Allow cities to offer and promote low-cost payday loan alternatives by community groups.
Encourage governments to provide market-based incentives for new alternatives.
Cardus concluded that there really is “no silver bullet” to address the dire problems associated with payday loans. However, there are numerous ways to protect consumers, whether it’s community action, government initiatives or encouraging banks to extend credit to the unbanked and underbanked.
The federal consumer watchdog agency conceded in the report that payday loans are costly.
“High household indebtedness and low levels of consumer savings, particularly the absence of a household emergency fund, make a payday loan a solution for many consumers despite their very high cost,” said Jane Rooney, financial literacy leader at the consumer agency, in a statement.
Across Canada, and throughout the United States and Europe, there are numerous jurisdictions that are trying to rein in the payday loan industry. Everything from new ordinance laws to fee restructuring, officials are looking at every possible avenue to restrict the growth and use of payday loan stores.
Opponents of payday loans say that these financial products create a debt trap for millions of desperate consumers. Proponents note that payday loans are an essential tool for those who do not have access to traditional forms of credit and banking options.