Low-income Canadians borrowed at up to 60% interest during COVID
A new report highlights the impact that expensive loans have had on low-income borrowers during the pandemic, citing examples of people falling into “debt cycles” as they struggle to meet the escalating costs of bills.
the report published Thursday by ACORN, which advocates for low- and middle-income Canadians, comes as the nonprofit group renewed its call for the federal government to lower the legal limit on interest rates on personal loans from 60 to 30 cents.
The survey of 113 ACORN members who turned to expensive lenders such as Money Mart, Easy Financial and Cash Money found that a high proportion turned to payday loans, which are short-term, smaller loans with extremely high annual interest rates.
But many also took out installment loans — which are repaid in installments over a longer period of time — ranging from $1,500 to $15,000 at annual interest rates of up to 60 percent.
“This should be a priority and the government should move this forward quickly,” said Donna Borden, an ACORN leader and spokesperson on predatory loans.
Borden noted that 46 percent of 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 eager to crack 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 on a consultation process on the matter would be available “in due course”.
To improve access to financial services, ACORN is also calling on the government to force mainstream banks to offer people lower-cost borrowing options and lower fees charged when customers don’t have sufficient funds to cover a transaction. The group is planning a national day of action on this topic for March 31st.
Laura Pellacani, who took part in the ACORN survey, had to take out a $2,500 loan just before the pandemic to cover the cost of flying her children back to Canada while they were abroad with their father. Because of the high interest rate on the loan, she said she would have to fork out about $6,000 to pay it off over five years.
“I didn’t have any options with banks,” she told the star in an interview, explaining that she couldn’t get a regular bank loan or credit card due to bad credit.
Pellacani, who collects ODSP, used to earn extra income as a dog walker, but work dried up when COVID-19 struck and her clients were all at home with their pets.
She has only been able to repay $500 of her debt and regularly resorts to payday loans to pay her bills. Even with a monthly delivery from a grocery bank, Pellacani said she’s struggling to pay for groceries as the cost of groceries increases.
Often forced to borrow a little more each month, she likens payday loans to a cycle that doesn’t stop.
“Payday loans target poor people who are struggling in daily life and living paycheck to paycheck,” she said.
Payday loans are regulated by provincial governments, and lenders are even exempt from the 60 percent interest rate limit. In Ontario, for example, where payday lenders can charge $15 interest per $100 over a two-week period, annual interest rates can be as high as 390 percent.
In a December mandate letter, Prime Minister Justin Trudeau asked Treasury Secretary Chrystia Freeland to “cfight predatory lenders by lowering the criminal interest rate.”
The Canadian Consumer Finance Association, which represents lenders including Money Mart, Cash Money and Cash 4 You, said in an emailed statement that cutting the statutory interest rate could actually hurt some borrowers by cutting off all access to financing.
Installment loans are risky and expensive to provide, the CCFA said, noting that a borrower’s creditworthiness is a key factor in determining the interest rate on such loans.
“Any reduction in the federal maximum interest rate results in Canadians with lower credit scores who previously qualified at the current rate being deprived of access to credit,” the CCFA said. “The federal government should not take any action that results in Canadians being denied credit or forcing borrowers to access credit from illegal, unlicensed lenders.”
Easy Financial, a public company that doesn’t offer payday loans but offers other types of alternative credit, said in a recent financial report that 8.2 million Canadians have a non-prime credit score of less than 720, meaning that many of them cannot access credit from banks or traditional lenders.
It estimates that these Canadians, which it calls its “target market,” have a combined $186 billion in assets.
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