Regulations in Hamilton a step in the right direction, but more must be done

It’s difficult to live in any Canadian city without stumbling across a payday loan provider.

To most Canadians, their flashy signs, obnoxious ads, and grandiose claims are more reminiscent of a sleazy car salesman than a financial institution. However, for our country’s impoverished, they are an essential lifeline in an increasingly unstable economic landscape.

In a bid to protect consumers, the City of Hamilton recently announced a regulatory crackdown on the payday loan industry. The city implemented additional licensing fees and mandatory credit counselling for would-be clients. By using a regulatory strategy similar to one that controls the tobacco industry, Hamilton hopes to discourage the use of these aggressive and predatory financial services through education.

And it’s about time.

After all, payday loans portray themselves as a quick and easy way to smooth out the peaks and troughs of living paycheque to paycheque. By providing short-term loans and requiring few, if any, prerequisites, they can be used by low-income individuals to temporarily put food on the table or cope with unexpected expenses.

However, this relief is often short lived as the vast majority of loans come with ludicrously high interest rates—upwards of 21 per cent biweekly. To those with limited financial knowledge, this rate can seem manageable. But it often results in the customer paying back the principal several times over by relying on the very financial situation that drove them to take out the loan in the first place. Because of this, double digit monthly interest rates can quickly cascade into annual rates exceeding 500 per cent. If the loan is not paid back immediately, the customer can quickly find themselves in a vicious cycle of futile repayment and compounding debt.

Despite the obvious damage the industry causes, government efforts to curb the payday loan industry have been met with significant indifference and resistance. Although part of this can be attributed to lobbying and misleading “awareness campaigns” by lenders, many of the industry’s supporters claim people have genuine need for short-term loans.

Banning outlets altogether removes an unsavoury yet essential tool for those trying to claw their way out of poverty, despite the fact that the government could be doing a lot more to minimize the ignorance that the market feeds off of.

Even with education and awareness, people still take out payday loans because they often lack the resources to use other options. For example, the need for the loan might be more immediate than the time it takes to approve a more formal arrangement. In other cases, some might lack the ID, documentation, or credit score to open a line of credit.

By cooperating with more established and appropriately regulated financial institutions, the government could create a program that provides the short-term, immediate relief people are looking for while keeping the reins tight on predatory lenders.

Abolishing systemic poverty is a sisyphean task, and the need for fast cash will always exist. But Hamilton is at least moving in the right direction with their new education-based approach to regulating predatory payday loans—and the rest of the province should follow suit as soon as possible.