Payday-lending deregulation might be the key to providing what clients of these loan stores really need
Credit unions have been chomping at the bit to offer alternatives to Ontario’s payday loan stores, but the current regulatory regime is hindering their ability to exhibit new products, according to a top official of a public policy think-tank.
In a contribution piece for the Financial Post, Cardus program director Brian Dijkema stated that payday loan providers fulfill a valuable role as they address the needs of the consumer segment called ALICE—Asset-Limited, Income-Constrained, and Employed.
“More than two-thirds of ALICEs earn less than $50,000 per year. And while payday lenders’ reputation for being the somewhat shifty cousins of banks is not entirely undeserved, they nonetheless provide a real and needed service to people who, for a variety of reasons, can’t or don’t have the cash to meet their needs,” Dijkema wrote.
These shops offer extremely-short-term loans (less than 62 days) for amounts less than $1,500 at grossly elevated interest rates (currently at 657% on an annualized basis on the average 10-day term).
“And that has consequences. Payday loans can lead customers to develop a habit — an addiction even — of using high-cost loans to meet their needs,” Dijkema said. “We’ve known about the challenge for a while, and the typical response has been to tighten already strict regulations. The problem with this approach, however, is that it simply raises the cost of providing what customers really need — better small-dollar alternatives — while driving solutions underground.”
Fortunately, the Ontario government is perfectly placed to address these issues.
“[The government’s] recent proposal to exempt these community banks from all payday loan regulations allows credit unions to experiment with cost structures, interest rates, loan terms and other factors that the rules otherwise prevented. For instance, a credit union might make space for a borrower to take more than 62 days to repay a loan,” Dijkema explained.
In fact, some unions are already taking the opportunity to try out novel approaches. “Windsor Family Credit Union’s ‘Smarter Cash’ program offers substantially lower rates than traditional payday loans. Other credit unions, including First Ontario, DUCA, and Libro are exploring ways that they can offer new products to those who need cash, and need it quickly.”
Ultimately, it will be to the Ontario housing segment’s benefit should these experiments bear fruit, Dijkema concluded.
“The Ontario government’s moves to exempt these institutions from regulations might not just be clearing a path to address a lack of payday-loan alternatives; they may also open a road to alternate solutions for other, bigger social problems.”
Related stories:
As mortgage market tightens, private lending is a growing opportunity
Many Canadians teetering on the edge of insolvency - study
In a contribution piece for the Financial Post, Cardus program director Brian Dijkema stated that payday loan providers fulfill a valuable role as they address the needs of the consumer segment called ALICE—Asset-Limited, Income-Constrained, and Employed.
“More than two-thirds of ALICEs earn less than $50,000 per year. And while payday lenders’ reputation for being the somewhat shifty cousins of banks is not entirely undeserved, they nonetheless provide a real and needed service to people who, for a variety of reasons, can’t or don’t have the cash to meet their needs,” Dijkema wrote.
These shops offer extremely-short-term loans (less than 62 days) for amounts less than $1,500 at grossly elevated interest rates (currently at 657% on an annualized basis on the average 10-day term).
“And that has consequences. Payday loans can lead customers to develop a habit — an addiction even — of using high-cost loans to meet their needs,” Dijkema said. “We’ve known about the challenge for a while, and the typical response has been to tighten already strict regulations. The problem with this approach, however, is that it simply raises the cost of providing what customers really need — better small-dollar alternatives — while driving solutions underground.”
Fortunately, the Ontario government is perfectly placed to address these issues.
“[The government’s] recent proposal to exempt these community banks from all payday loan regulations allows credit unions to experiment with cost structures, interest rates, loan terms and other factors that the rules otherwise prevented. For instance, a credit union might make space for a borrower to take more than 62 days to repay a loan,” Dijkema explained.
In fact, some unions are already taking the opportunity to try out novel approaches. “Windsor Family Credit Union’s ‘Smarter Cash’ program offers substantially lower rates than traditional payday loans. Other credit unions, including First Ontario, DUCA, and Libro are exploring ways that they can offer new products to those who need cash, and need it quickly.”
Ultimately, it will be to the Ontario housing segment’s benefit should these experiments bear fruit, Dijkema concluded.
“The Ontario government’s moves to exempt these institutions from regulations might not just be clearing a path to address a lack of payday-loan alternatives; they may also open a road to alternate solutions for other, bigger social problems.”
Related stories:
As mortgage market tightens, private lending is a growing opportunity
Many Canadians teetering on the edge of insolvency - study
