A payday-loan company has been ordered by Consumer Protection B.C. to begin repayment of about $1 million in illegal fees it charged on 68,000 loans. The company charged extra fees when it issued loans in the form of cash cards, which contravenes B.C. law, although the company claims that because the cards were issued by a third party, the law did not apply.
Apart from that specific charge, the case shines a light on payday loans: The fees charged legally for the short-term loans can amount to the equivalent of an annual interest rate of nearly 600 per cent. Why would any government allow that?
More importantly, why would anyone take out such a loan? It makes no financial sense. Perhaps the answer lies more in individual awareness and responsibility than in government regulation.
The typical payday loan, borrowed against an anticipated paycheque or pension cheque, is about $300 for two weeks. For that, lenders in B.C. can charge $23 per $100. A cash advance on a credit card, in contrast, would cost about $2 per $100 for the same period.
In all likelihood, those who use payday loans do not qualify for a credit card. Payday loans are advertised as a means to handle an emergency, but taking out that kind of a loan just digs a deeper hole.
Research by Pew Charitable Trusts in the U.S. shows that most borrowers use payday loans over the course of months, and borrowers are in debt for an average of about five months of the year.
Perhaps the best advice on the matter comes from the industry itself. This from the website of the Canada Payday Loan Association:
“Payday loans are for occasional use only and should not be used to cover continual shortfalls in your budget. If you have ongoing problems meeting your financial needs or debt obligations, you have a couple of options. Take a learning path to budgeting, saving and other important financial education tools. Or you should consider consulting with a credit counsellor.”
It’s not counsel you’ll likely get from the storefront lender, but it’s counsel well worth heeding.
