A Canadian financial group is trying to reshape the market for "payday" loans in B.C., introducing a short-term lending alternative aimed at people struggling to make ends meet who are often under served by mainstream financial institutions.
Vancouver-based credit union Vancouver City Savings Credit Union recently launched a product for its members that could replace payday loans, the cash advances some people use to get through to the next paycheque. About two million people are estimated to take out payday loans, or use cheque cashing services, in the country each year, according to the Canadian Payday Loan Association (CPLA).
"The financial sector hasn't been meeting this need," said Linda Morris, senior vice president of business development at Vancity. "If it isn't going to be met on one side of the street, people will go to the other … We're trying to say we think we can do something different here."
Vancity's "Fair & Fast Loan" is offered to its credit union members in amounts up to $1,500, and borrowers can take up to two years to pay back the loan, rather than the traditional two-month term of most payday loans, allowing a credit rating to be built up.
The largest draw is likely to be the low fees. The credit union said a $300 loan with a two-month term that was paid in two weeks would cost $2.20 in interest payments. That works out to a 19-per-cent annual percentage rate, or APR, well below the nearly 600 APR charged by some payday lenders for the same loan.
The payday loan industry thinks more competition from new entrants is good for customers. But the group does not see other banks or financial institutions offering short-term credit alternatives any time soon.
"What the consumer of the payday loan product wants is to walk in, put evidence down and be out of there with their loan in less than 20 minutes," said Stan Keyes, president of the CPLA, the industry group representing more than 800 retail providers of payday loans and cheque-cashing services. He questioned whether Vancity's longer wait and conditions would be attractive to the typical payday loan customer. Payday lenders can move as quickly with the limited conditions they require, and the price is higher fees.
"We do have a bit of a conversation – we're not as fast as other payday loans – but on the other hand, I think there are some real benefits [such as] the opportunity for the future," Ms. Morris said.
Canadian payday lenders have faced criticism in recent years from government officials and other groups that said the lenders prey on customers with bad credit and often send borrowers spiralling toward bankruptcy. In 2007, the federal government amended the Criminal Code to give provinces the power to cap payday-loan interest rates below the federal threshold of 60 per cent a year.
Manitoba was first to crack down with lower fees in 2008, bringing maximum interest rates down to 17 per cent for payday loans up to $500 . Most other provinces followed with legislation capping charges at between 20 and 30 per cent. The maximum rate in B.C. is 23 per cent, which works out to about 600 per cent on an annualized basis for a 14-day loan.
Governments are considering further regulation. Ontario said it would review the province's Payday Loan Act with an eye on technology, online loan approvals and consumers seeking multiple loans. It also planned to review the maximum amount companies can charge, which is currently capped at $21 for every $100 borrowed.
In Britain, the Church of England is preparing to launch the Churches' Mutual Credit Union (CMCU) in October as a counter to payday loan outlets. The church has been campaigning against these lenders saying they are "fuelled by stagnant wages, rising living costs and limited access to mainstream sources of credit." It praised Canada and the United States for introducing stronger regulation.
Many Canadian payday-focused firms were casualties during the provincial crackdown on fees. Mr. Keyes said this helped clean up the industry, but he is worried about the effects of too much tightening.
"If a province over regulates a product to make it so difficult, and the margins so low, to operate, [payday lenders] just say 'sorry, we can't do that,'" Mr. Keyes said.
The pent up demand for loans might go offshore to online lenders in the Cayman Islands or Belize, or to unregulated native reserves, he said.