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According to one expert, recent regulatory changes may be spurring Ontarians to borrow more as interest rates decline.Doug Ives/The Canadian Press

Payday loans were a growing factor in personal insolvencies in Ontario for the sixth consecutive year in 2017, despite recent provincial regulatory changes to curb borrowing rates and improve disclosures by lenders.

A review of 3,500 insolvency cases by insolvency trustee firm Hoyes Michalos found 31 per cent of people who made insolvency filings in 2017 had payday loans as part of their debt load, up from 27 per cent in 2016 and 12 per cent in 2011.

Douglas Hoyes, insolvency trustee at Hoyes Michalos, said recent regulatory changes for payday loans have not prompted people to borrow less, and may be spurring more borrowing as interest rates decline because people can afford to carry larger loans.

Among recent changes, the Ontario government reduced the maximum amount lenders can charge for a payday loan to $18 for every $100 borrowed from $21 for each $100 on Jan. 1, 2017. The rate was further reduced to $15 as of Jan. 1, 2018. The change came after consumer advocates complained that repeat borrowers were paying interest rates equivalent to 540 per cent on an annual basis, contributing to crippling debt spirals.

"I'm not faulting the government, but how does human nature work? I don't think lowering the interest rate has made people borrow less – that's not how supply and demand works," Mr. Hoyes said. "I'm not convinced these new changes will actually do what's intended."

The province is making further changes on July 1, which will require lenders to advertise the annualized interest rate for loans in addition to the cost per $100 borrowed, and will cap loans to not more than 50 per cent of a borrower's prior month's net income. Lenders will also have to offer an extended payment plan to people who take out three loans within a 63-day period.

Mr. Hoyes said his insolvency clients have an average monthly net income of almost $2,600, which means their maximum borrowing limit under the new rule would be about $1,300, which is higher than the average individual loan they are currently taking out of $1,095.

"I worry that you go into the payday loan place and they say the maximum you can borrow is $1,300, and people say, 'Okay, give me $1,300, then. Why only take $1,000?'" he said. "I'm not saying it will happen, but it certainly would be an unintended consequence."

The study found insolvent borrowers took out fewer but larger payday loans in 2017, with the number of loans outstanding at the time of insolvency falling to 3.2 in 2017 from a peak of 3.5 in 2014, but the average individual loan size climbing to $1,095 in 2017 from $974 in 2016.

In total, insolvent borrowers owed an average of $3,464 from all their payday loans, or $1.34 for every dollar of their monthly take-home pay. They also owed an average of $29,997 in other unsecured debts. Mr. Hoyes said many clients he sees are using payday loans to keep up with other debt payments, including bank debt and lines of credit.

"That's what's so scary – the amount they owe on their payday loans is more than a month's income, so it's impossible to use their next pay cheque to pay them off," he said.

The review also found that middle-income and high-income earners are more likely to take out payday loans, more likely to have multiple payday loans, and borrow more on average.

Borrowers between the ages of 18 and 29 were the most likely group to turn to payday lenders, with payday loans outstanding in 45 per cent of insolvency cases in that age category. Average payday loans represented 117 per cent of their monthly income.

People older than 60 were least likely to have payday loans, but had the largest amount outstanding when they did use them, averaging $4,377 owed at the time of the insolvency filing. That equalled 176 per cent of their average monthly income.

Mr. Hoyes said payday lenders should be required to provide borrowers with information on all debt-management options, and should not be allowed to offer "teaser" introductory rates that encourage excessive borrowing. They should also report all loans to credit reporting agencies, he said, so that other lenders know the borrower has outstanding payday loans.

Rob Carrick speaks with insolvency trustee Doug Hoyes, on the trouble with debt; Should you always pay yourself first when it comes to finances?

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