A few months ago, Desiree Wells' paycheque arrived a couple days late.
What would be an inconvenience for some turned into a serious headache when payments for her phone, internet, tablet and payday loan were charged to her empty bank account, resulting in significant NSF (non-sufficient funds) charges.
Wells has an artificial leg which she says limits her ability to work, and earns about $1,000-$1,200 a month providing child care and selling the jewelry she makes.
The New Westminster woman lives frugally and shares an apartment with a boyfriend and roommates.
The NSF charges have spiralled into the hundreds of dollars, and are the most recent financial difficulty for Wells, who has a bank account but no overdraft due to lack of a positive credit history.
Compounding tight finances is a payday loan habit that she can't shake.
About a year ago, she was short of cash and resorted to an online payday lender for an extra $100. Though she paid it back in full, including the interest fee of about 40 per cent, it meant she was now down about $140 the following month.
"Like I'm sure everybody can attest, you get one (payday loan), then the next month you get a little bit more because of what you have to repay," said Wells. "Then like a snowball it just gets out of control."
The loan has ballooned to $350 a month, with the interest bringing that number to $500.
"It's now costing me almost $150 every month, just to pay the interest."
She's managed to hold the line at $350, but it means her already meagre income is significantly diminished.
Because Wells' payday loan was secured online, it was likely not subject to any rules, such as limits on the interest charged.
But for licensed payday lenders in B.C., payday loans are defined as being for amounts up to $1,500 and are to be paid back on your next payday, at most within 62 days.
In B.C. fees are capped at $23 per $100 loaned.
Sounds reasonable, perhaps, though critics point out the interest on an annual basis works out to about 600 per cent.
As much as Wells hates them, she says payday loans are easy.
The outlets are convenient—open late at night, open weekends—and they don't mind the fact that you don't have a positive credit history.
This area is a mecca for payday lenders.
In Burnaby there are three Money Marts, two Cash Stores, a Money Tree and a variety of other lenders, including several that will let you put your car up as collateral.
In New Westminster, there are a whopping 10 payday lenders, including three Money Marts.
Why should the poor pay more?
For cheque cashing or a small loan, payday loan institutions charge fees that are significantly higher than banks and credit unions.
An overdraft or a line of credit at the bank can be charged just three or four per cent interest. If the balance is paid on time, credit cards charge no more than an annual fee.
If the balance is carried, the interest typically ranges from 10 to 20 per cent annually.
But people with poor credit, on social assistance, irregular work histories, or simply a low income are often turned down for loans, overdrafts and credit card services by mainstream financial institutions.
The result is that people with a low income end up paying more for financial services.
"On the surface it appears to be quite contradictory," says Jerry Buckland, a University of Winnipeg professor and author of
Hard Choices: Financial Exclusion, Fringe Banks and Urban Poverty in Canada.
Everyone faces the occasional "lumpy investments," as Buckland calls them, whether it be an emergency car repair, new furnace or some bridging funds when you're between jobs.
It can be several thousand dollars in the case of someone with a moderate income, or perhaps a couple hundred for someone of more modest means.
Though some might say people who get into the payday loan vicious cycle, like Desiree Wells, have only themselves to blame, Buckland says their options are more limited than in the past.
There was a time when there were more choices for informal financing, whether a tab at the local restaurant or corner store, layaway at the department store or borrowing from a friend or family member.
And there was a time when banks were more accessible to everyone.
In recent decades, Buckland says, banks have withdrawn services from low-income neighbourhoods—and people—and have focused services on "higher-asset individuals."
Fringe banks have moved in to fill the void.
These are the payday loan and cheque-cashing operations. Rent-to-own furniture shops and pawn shops can also be lumped in.
The result, Buckland says, is "poor people pay more."
Someone living on low income is less likely to have a car to go shop around and less likely to have computer access to look for the best deals.
Paying more for groceries is a problem, but Buckland says paying more for financial services can be even more serious, particularly if it supports a vicious cycle of credit.
Laying down the law
The Canadian Payday Loan Association (CPLA), which represents 764 of the 1,635 retail outlets in Canada, says there's a demand among consumers for short-term credit, and that payday loans are neither the most expensive nor least expensive options out there.
There's a fixed cost to the borrowing, the CPLA says, and it's clearly stated up front.
As well, says CPLA president Stan Keyes, dealing with a licensed payday lender is a safer option than turning to an unregulated online lender that could be offshore.
"Or to someone in a pool hall where physical harm might be part of the contract," Keyes said.
And bluntly put, payday loan businesses are willing to gamble on a risky venture—people whose finances are already touch-and-go.
Those who lend to high risk borrowers will experience higher losses.
In fact, the industry has grown because this need has not been met by traditional financial institutions.
Just a few years ago, payday lenders were effectively unregulated
New rules, better protection?
B.C.'s laws, introduced in 2009, created a strong framework to regulate payday loan practices, says Manjit Bains, vice president of corporate relations for Consumer Protection BC.
Other provinces were also introducing their own legislation around the same time.
Bains says consumers are much better protected as a result. For the first time in B.C., payday lenders must be licensed through Bains' office.
Rules were also established outlining the maximum interest that could be charged. And if the institution failed to disclose information to the satisfaction of Consumer Protection BC, a client could cancel their contract and pay either just a portion or even none of the fees due.
The final important change was that prohibited business practices were spelled out, such as providing another payday loan when a customer has one outstanding or requiring a customer to provide property as security against the loan.
"All those things did not exist prior to 2009," Bains said.
"The new laws definitely protect consumers in a number of ways."
Her office is also enforcing the rules.
Last year, it ordered Cash Store to pay more than$1 million in refunds,
plus a penalty, for overcharging customers since the new laws were put in place in 2009.
Scott Hannah, president and CEO of the Credit Counselling Society
of B.C., says he's seen a positive change with the new laws.
His organization, which has its head office in New Westminster, offers free help to people in financial distress.
Since the new laws came into effect, Hannah says there's been a 30 per cent decline in people citing payday loans as the reason for their financial troubles.
In 2012, of the 11,152 clients they served, just 188 of them blamed their troubles on payday loans.
Still, Desiree Wells is someone who believes her life would be a lot better off without a payday loan.
"Don't do it," she advises. "You'll regret it." The vicious cycle of payments has been painful, she says, and relief feels like a distant hope.
"Unless for some reason you come into a nice little chunk of cash. And when's that going to happen to someone like me?"
MORE IN THE SERIES:
• Can banks do more to serve the poor?
• Is Cash Store Financial exploiting a loophole?
• • • • •
Top three things to know about payday loans
1. Payday loans are short term loans of under $1,500 that must be repaid within 62 days when the borrower receives other income.
2. Total fees must never be more than 23 per cent of the amount borrowed and should not be charged for cash cards.
3. Consumers have the right to change their mind and cancel the loan by the end of the following business day for any reason, without paying any charges.
Source: Consumer Protection BC
Consumer Tips
1. Check to see that the payday lender is licensed with Consumer Protection BC (remember: all payday lenders operating in B.C. are required to be licensed). A licensee search tool is available at www.paydayloanrightsbc.ca.
2. Always get a copy of the contract. By law, B.C. payday lenders are required to provide a signed copy of the loan agreement to the consumer at the time of signing.
3. Shop around for a rate. Payday lenders must have posters showing the rates they charge.
4. Know your rights when entering into the loan. Total fees must never be more than 23 per cent of the amount borrowed – no matter what.
5. Never pay up front to borrow money. In B.C., it is illegal to ask for money up front to obtain a loan.
Source: Consumer Protection BC
