Ontario should cap the cost of payday loans at $21 for every $100 borrowed and review that limit in two years, an independent advisory board has concluded.

But the short-term loans — which critics say rip off consumers with sky-high interest rates — should not be available to everyone, the group said Friday in a report to the Liberal government.

Payday loans should only be granted to consumers who can "realistically" be expected to pay them back on time, it said.

Loans shouldn't be advanced to welfare recipients, for example, because they are too risky for both the borrower and the lender, it added.

Critics have long complained that the payday loan industry has been gouging consumers by charging annual interest rates of up to 800 per cent.

Anti-poverty groups and political parties such as the federal NDP have accused the industry of preying on transients and people who live in low-income neighbourhoods.

However, the board concluded that payday loans are expensive because they're designed as small, short-term loans — not because the industry is earning "excessive" returns.

Most borrowers are in "financial distress," but loans are generally advanced to those who have jobs, it noted. People on welfare don't qualify for loans from most payday lenders in the province.

Of the 750 payday loan locations in Ontario, almost half are currently lending near or below the maximum amount recommended by the board, according to the Ontario government.

Minister to decide on possible action

But it may be weeks before Small Business and Consumer Services Minister Harinder Takhar announces whether he will follow the board's advice, said spokeswoman Sarbjit Kaur.

Other provinces have already set limits on what payday lenders can charge their customers.

Nova Scotia companies can charge no more than $31 on $100 of borrowing, fees and interest included, while Manitoba caps the cost at $17 on $100 of borrowing for loans up to $500.

Ontario, Quebec, British Columbia, Manitoba, Nova Scotia, Alberta and Saskatchewan have all taken steps to regulate the industry.

The federal government passed the responsibility of regulating the industry to the provinces in 2007.

Ontario's legislation allows the province to cap the total cost of borrowing, although that limit has not yet been determined.

It also established an inspection and enforcement regime and banned controversial lending practices like issuing concurrent and back-to-back loans.