Roughly two months ago, Toronto’s general government and licensing committee was urging city council to stop issuing licences to new payday loans stores.
The argument was — and still is — that payday loan shops (think MoneyMart, Cash4You, and Cash Money) are largely situated in some of the city’s lowest-income neighbourhoods and as a result, trap vulnerable residents in a cycle of debt by charging exorbitant interest rates, some as high as 46%.
About a month later, on Oct. 2, city council voted unanimously 20-0 to immediately stop issuing licences to these “predatory” lenders.
It was a significant municipal step toward cracking down on the proliferation of these stores — but one that targeted brick-and-mortar locations only. The problem is many of these lending outfits also live online. And while moving this style of lending behind a computer screen is incredibly convenient for the borrower, it comes with its own set of risks.
Less shame, less justification
“The only barrier for a lot of people going into a payday loan office is that it’s uncomfortable,” says Scott Terrio, manager of consumer insolvency at Hoyes Michalos & Associates Inc., a licensed insolvency trustee firm in Toronto. “These places have bars on the windows, and everybody’s looking at you. I’ve even seen physical payday lenders in more affluent neighbourhoods where their entrance is at the back.”
It’s no question, then, that being able to get a payday or installment loan online — where there’s no need to interact with a human or be seen by one — is an incredibly attractive option. But, says Terrio, “The ease of access is too high. It’s good that there’s a physical barrier for people to go into these stores.”
Online lending also reduces the amount of justifying the borrower has to do to the lender.
You’re making it easier. And who wants things to be harder?
“I used to be a loans manager with Scotiabank, handling loan applications from our customers,” says Richard Killen, now a licensed insolvency trustee in Toronto. “If you had to convince me to lend you $500, first of all, you had to convince yourself. You had to give it some thought. Can I afford this? Because he’s going to ask me. There was a pressure to justify and to be somewhat thoughtful about incurring the debt.”
That’s not to say that people borrowing from online lenders are thoughtless about what they’re doing (both Killen and Terrio say that the clients they see with payday or installment loans are just doing whatever they can to make ends meet). It just means that the physical and human barrier for justifying this loan is removed.
“I think what these things do,” says Killen, “is remove the safeguards that would be there in the ordinary interaction between a lender and a borrower.”
“Because of the connected online world, we're starting to see means of access that don't even involve carrying a piece of plastic.”
Most don’t report to credit bureaus
According to Terrio, it’s highly unusual to see a payday lender on a credit report. Yet in 2018, 37% of all insolvencies in Ontario involved payday loans, up from 32% the year before. Most payday lenders, Terrio says, don’t report delinquent customers to credit bureaus.
Why? Because it’s more lucrative for them not to.
“They don’t want to say no to people,” says Terrio. “They are high-risk and high-reward. These places are also notoriously very profitable so something’s going right.”
You can sit at your computer in your pyjamas and get a payday loan in five minutes
That’s yet another reason why payday and installment lenders are so attractive — and why their online options are so alluring. No need to interact with anyone; no concern about it affecting your credit rating. Seems like a win-win.
“Online you can sit at your computer in your pyjamas and get a payday loan in five minutes,” says Terrio. “And because they don't report to the credit bureaus, they never have to say no. So if you have 10 payday loans and you go in to get an 11th, well, I’m not turning you down. Because it doesn't show on your credit report.”
Because of their easy access, both Terrio and Kiillen expect to see online lending outfits proliferate in the near future.
“You’re making it easier,” says Killen. “And who wants things to be harder?”
Back in October, Toronto councillors also voted in favour of capping the fees payday lenders can charge borrowers on payday loans, to $15 for every $100 loaned. They also voted in favour of asking the provincial government to cap annual interest rates on payday loans to 30% or less.
What this did, Terrio says, is spurred payday lenders to start giving out even bigger loans.
“In an attempt to clamp down on payday lending, what they did was, number one: drove the payday lenders to say fine, we’ll stop giving those out as much and we’ll loan big installment loans. And number two: it drove them online because one of the law changes had to do with physical locations.”
Instead of lending out payday loans, which can be up to $1,500, these lenders got into the business of installment loans and lines of credit, and are handing out much larger amounts, in the $10,000 to $15,000 range.
“Our database is full and yet every week we add a payday lender who’s online," says Terrio. "The easier you make it for people the worse it’s going to get.”