Consumers in Ontario are risking financial ruin by taking on debts at high interest rates from payday loan lenders.
A new report from licensed insolvency trustee firm Hoyes, Michalos & Associates Inc. reveals that the share of consumer insolvencies that involve payday loans has increased from 32% in in 2017 to 37% in 2018.
"Regulatory changes to lower the cost of payday loans and lengthen the period of repayment are not working for heavily indebted borrowers who feel they have no other option but to turn to a payday loan," says Ted Michalos. "And the industry itself has just adapted, trapping these consumers into taking out more and even bigger loans, adding to their overall financial problems."
The report says that the availability of online payday lenders has exacerbated the problem with consumers having access to ‘easy money’ on their smartphones.
"At the same time, heavy users circumvent rules to limit repeat use by visiting more than one lender, and there are no safeguards in place preventing them from doing so," warns Doug Hoyes.
How much do they owe?
The average insolvent Ontarian payday loan debtor owes $5,174 with an average of 3.9 different loans.
Interest rates typically range from 29.99% to 59.99% for longer-term loans while traditional payday loans have typical rates of an eyewatering 390%.
That all adds up to indebted borrowers owing more than double their monthly salary.
"Heavily indebted borrowers need a more robust debt management solution," adds Doug Hoyes. "They cannot borrow their way out of debt. The earlier they speak to a professional like a Licensed Insolvency Trustee, the more options they have available to get those debts under control and the sooner they can recover financially so they are not reliant on payday loans at all."
Legislation should be changed
The firm says that there should be some legislative changes to tackle the rising issue.
It says that payday loan lenders should be required to:
- Report all short-term loans to credit reporting agencies, so all lenders are aware of existing payday loans. We believe this will also help borrowers improve their credit score when they repay existing payday loans.
- Discontinue the use of introductory teaser rates that only serve to entice a borrower onto the payday loan cycle.
- Provide overly indebted borrowers with information on all their debt management options including a consumer proposal and bankruptcy.
“Current legislation fell short," says Ted Michalos. "It is not limiting the ability of heavily indebted borrowers to obtain credit well beyond their ability to repay."
More market update: