Are Payday Loans Criminal?

Many of us know about payday loans, or have at least seen one of the many storefronts offering them – there are over 1300 in Canada, after all. And while many of us know of, or have heard of, these storefronts that charge extremely exorbitant fees and interest rates, are payday loans criminal?
A payday loan works very simply. You go in and ask to borrow a certain amount of money (according to the Canada Payday Loan Association, the average amount borrowed is $280. You then write a cheque to the store, post-dated for your next payday, and you get your money. All you have to do is have a job, bring in a paycheque stub, have a bank account, and a permanent address. And of course, you have to be prepared to shell out hundreds of dollars possibly, in fees.
How much does a payday loan cost?
This is the part where it could become criminal. Excluding the amount of money you borrowed that will have to be paid back, payday loans also charge: interest (which varies from store to store but is always much too much); administration fees; processing fees; convenience charges; broker’s fee; collection fee; early repayment fee; late repayment fee; a set-up fee; and a rollover fee. With these fees and the interest charges alone, the Financial Consumer Agency of Canada says that at payday loan storefronts, the average amount to be paid back on a $300 loan is about $400. This, the Agency says, equals out to about a 435% interest rate on a two-week loan. Ridiculous? We thought so. Especially after you combine this information with the laws laid out in the Criminal Code of Canada.
The Code states that no lender can offer loans that carry more than a 60% annual interest rate. If any lender does, they are acting unlawfully and could face up to five years in prison. So how are all those payday loan stores still standing? Well, they manage to just get scrape by under the Code, charging an actual interest rate that sits just slightly below that 60% annual rate. But – and it’s a big one – it’s all those extra fees that make your tally climb so high; and there is so far no regulation regarding those, which are considered to be separate from the interest rate. And with those fees, the store gets their inflated profit, while still remaining ‘legal.’ In the end, even though they’re technically playing by the rules, you still get burned.
What might be even worse is that there’s not currently anything that can be done about this business practice. Interest rates are set at a federal level, but consumer protection, which this is a case of, is regulated at a provincial level. Because of this, payday loan stores have almost no regulation and no codes to adhere to. This is with the exception of Quebec, a province in which payday loan stores are illegal to operate. But it’s not hopeless.
The Canadian Payday Loan Association is stepping in and trying to help. They have currently set up a Code of Best Business Practices for the 850 retail outlets across the country that they control. This Code states that these stores are not allowed to give extensions or “rollovers” on loans, which would keep people in debt for a longer period of time. The Code also states that they must make credit counselling services available, and that if an individual does not pay their loan, they must be advised that these services are available. In addition to that, if the individual then seeks the help of these services, the store must then forgive the accrued interest charges on the loan.
But, not every store practices this Code, and with over 1300 in Canada, there are still hundreds that don’t. So what is a consumer to do? Simply forget about payday loans. They are by far, the most expensive way to borrow money, and they’re not necessary. With secured lines of credit, home equity loans, and HELOCs, there are many better ways to borrow than paying over 60% interest. And, with credit card interest rates being half that, payday loans make even this kind of borrowing look good!