Cost of Living

The Criminal Code bans interest rates above 60 per cent — so how are payday lenders legal?

Payday lending outlets, such as Money Mart, can charge fees that amount to six times the federal interest limit, because of an exception to federal laws that can bring the short term lenders under provincial jurisdiction.

Lenders such as Money Mart can charge fees that amount to six times the federal interest limit

This payday loan outlet is one of many on Eglinton Ave. in Toronto, ON. (Richard Raycraft/CBC)
Listen4:12

Your car breaks down, but you need it for your work. You can't get a line of credit and your credit card is maxed out. You're in a real lurch. Who can you call?

The Money Mart down the street will loan you the $1,000 you'll need for the repairs, but it'll cost you, according to a calculator available on the company's website.

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You'll owe a total of $1,150 when you get your next pay cheque. Assuming that's 14 days later, you've paid an annualized interest rate of 391 per cent.

That's a lot higher than the federal limit of 60 per cent, as set out in section 347 of the Criminal Code.

This payday loan calculator from Money Mart shows a annualized interest rate far above what the Criminal Code allows, due to an exemption for payday lenders. (Screenshot/moneymart.ca)
Rates like that theoretical 391 per cent have led a number of municipalities, including Toronto, to crackdown on payday lenders. Ontario has also announced stricter regulations this year.  

The industry is small, but it is growing in Canada. According to the federal government, four per cent of Canadians had taken out a payday loan in 2014 — double compared to 2009.

Provinces regulate payday lenders

Despite the restriction on high interest rates in the Criminal Code, the federal government introduced an amendment in 2007 that provided an exception to the law for payday lenders if provinces brought in their own regulations for the industry.

Payday loans in Newfoundland and Labrador were regulated by the province in 2019. (Danny Arsenault/CBC)
To date, all ten provinces have, with the most recent being Newfoundland and Labrador in 2019.

"The payday lenders lobbied very vigorously for it. They used to be a bigger lobby than they are now," said Chris Robinson, professor of finance at York University. "But the belief was that nobody else would lend to the people that payday lenders are lending to, and therefore they should be allowed."

In a statement sent to CBC Radio's The Cost of Living, the Canadian Consumer Finance Association, which represents payday lenders in Canada, did not dispute that assertion.

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"For many Canadians, a payday loan is the only source of credit available to them during their time of need," it said.

The lobby group referenced a 2016 survey from the Financial Consumer Agency of Canada (FCAC) to point out that payday loan use is not restricted to low income Canadians, with 20 per cent of survey respondents reporting annual household incomes exceeding $80,000.

The segment of society that's being hurt by it, is not a segment that really has the ear of government … it's low income people.- Chris Robinson, professor of finance at York University

However, that same survey, which interviewed 1,500 payday loan users in Canada, also reported a majority of respondents were not aware a payday loan is a more expensive way of borrowing money compared to other options.

60 per cent of those surveyed did not have access to a credit card, and 88 per cent did not have access to a line of credit.

People walk past this payday loan outlet in the GTA in 2017. (Doug Ives/Canadian Press)

"Why do you think [payday lending] happens? Well because the segment of society that's being hurt by it, is not a segment that really has the ear of government. Indigenous people borrow far more frequently from payday lenders, and of course it's low income people," said York University's Chris Robinson.

"It's a very small operation, but it's disproportionally bad for that small number of people that use it."

It's everywhere except Quebec

Quebec has taken a different approach from other provinces when it comes to regulating payday loans.

That province caps interest rates at 35 per cent — which functionally means most payday loan operators couldn't offer them profitably, according to Robinson.

"The average payday lender lends 10 loans a day in that store, and the loans average $400 or $500 each. You have to charge an incredibly high fee just to pay the rent and the staff, let alone make any profit and pay for your losses," explained the financial researcher.

Post office as an alternative?

Robinson said there are alternatives to bring financial services to lower income Canadians, including addressing the disappearance of bank branches from remote communities.

One of Robinson's suggestions is to bring back postal banking — something that countries like France and Australia offer. This would mean that post offices in remote communities would offer financial services in collaboration with select banks.

In conjunction with other changes to make banking more "welcoming" to lower-income Canadians, such as universal overdraft protection, payday loans would effectively disappear, he said.

"The payday lenders would essentially be knocked out of business. They wouldn't be able to get enough customers to justify the business."


Produced and written by Richard Raycraft.
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 airs every week on CBC Radio One, Sundays at 12:00 p.m. (12:30 NT).

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