They are what pawnshops have traditionally been: a sign of bad times.
Cheque-cashing and payday loan outfits appear at times to be as numerous as donut shops or convenience stores. While governments have moved to regulate some of the industry’s most scammy and scummy tendencies – Ontario’s tweaks to its Payday Loans Act, introduced in 2008, has led to some smaller operations shutting down – there’s been no move to do what’s right: ban the entire industry.
The government tendency to protect financial gain over the public good is clear in this case, allowing more people to fall into the claws of a predatory industry. While our consumer society has become increasingly dependent on debt, payday lenders prey on the most vulnerable.
There’s a tendency for concurrent loans at multiple payday hucksters – those locked in the cycle of usurious fees and interest rates tend to flit from lender to lender, robbing Peter to pay Paul, as it were. With no central government oversight of the practice, it’s easy for some people to get in way too deep.
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The entire business is essentially parasitic, preying on the desperate. Payday loans are an expensive form of credit. Before getting a payday loan, consider that almost any other way of borrowing money (e.g., from family or friends, a bank or credit union or your credit card) would be much cheaper.
The Payday Loans Act was introduced to license all operators and ban some of the most controversial lending practices. Even then it was really too little, too late – the industry should have been axed right from the beginning, given its propensity for preying on those who can least afford it.
Far more troubling than the unethical practices, the industry is a sign of the underlying decay of our financial health – we’re maintaining our middle-class lifestyles mostly through debt. We might appear to prosper for a while by consuming beyond our means, but we’re already fraying at the edges, and not just in the unsustainable housing market.
Easy credit and low interest rates have fuelled the borrowing, but it’s our spending habits that have got the better of us: bigger homes, new cars, electronic toys and so on. Our wants are limitless. Our wallets, not so much.
Worse still, our real incomes and net worth are in decline, meaning we’re borrowing just to maintain the status quo.
More of us are getting caught between falling incomes and growing household debt, which reaches an all-time high pretty much each month. Statistics Canada reported this week that the household debt burden –the ratio of credit market debt to disposable income – rose to 183.3 per cent in the third quarter from 182.6 per cent in the second quarter. In short, Canadian households owe $1.83 for every dollar of disposable income.
Financial liabilities were up $41.2 billion during the third quarter due to growth in mortgage and non-mortgage debt, the agency reports.
Higher interest rates see debt-servicing costs rise while at the same time driving down the value of real estate – Canadians saw the value of their homes drop by a collective $271 billion, a 3.4 per cent drop in the third quarter of the year.
While we’ve adjusted spending downward such that there was a positive improvement between disposable income and household debt, we’ve seen an increase in the use of borrowed money to finance day-to-day expenses rather than consumer goodies.
This is no accident, nor is it the result of the financial crisis that began with the meltdowns of 2008, as the middle class has been under assault for more than three decades. The recession and “recovery” that followed collapse caused by the financial services industry is indicative of the trend: corporate profits and executive bonuses quickly bounced back, while unemployment remains high and those with jobs work longer and harder to tread water.
The decline to virtual serfdom is intentional. Look at the history of automation and productivity gains in industry. They were supposed to bring us a higher standard of living and more leisure time. Instead we got neither. In fact, just the opposite happened. Corporations did in fact make larger profits, but the money was shuffled into the hands of a few and into dubious financial transactions. At first, workers in Canada, the U.S. and other advanced economies were displaced by the productivity gains. Real wages fell as unemployment levels rose, putting more downward pressure on incomes due to the competitive job market. Later, of course, more of the jobs were transferred offshore to low-wage countries, a trend that continues today. The result? More profits, with almost all of the gains concentrated in a few hands.
Governments routinely aid and abet the shift. That’s why there is no effort to shut down the payday loan industry: someone profits – and gives money to politicians – and the lenders serve as something of a safety valve, albeit damaging and ultimately futile, as people sink into a financial morass, starting with the most vulnerable.
Despite the fact payday loans are an expensive way for consumers to borrow money, the use of those short-term, high-cost loans has more than doubled in Canada recently to four per cent of Canadian households, reports Financial Consumer Agency of Canada (FCAC).
Roughly 45 per cent of respondents to an FCAC survey reported typically using payday loans for unexpected, necessary expenses such as car repairs, while 41 per cent used them for expected, necessary expenses such as utility bills. Compared to the general population, respondents were also substantially less likely to have savings or access to credit cards or a line of credit.
The FACA survey shows that while payday loans are primarily used by those with low-to-moderate incomes – more than half lived in households with annual incomes under $55,000 – many higher-income Canadians also reported accessing these loans. Twenty per cent of respondents reported household incomes exceeding $80,000, with seven per cent over $120,000.
The entire credit industry that keeps those in the middle afloat just now is set to swamp that group, too, if given enough latitude. That’s always been the case, regardless of “regulation.” Don’t expect that to change.