Do you rely on payday loans? The Coronavirus pandemic has been tough for a lot of Canadians, especially the most vulnerable. If you don’t qualify for the Canada Emergency Response Benefit (CERB), you could find yourself relying on payday loans to survive.
In this article we’ll look at what are payday loans. We’ll also look at measure the Ontario government is taking to cap interest and fees on them.
What is a Payday Loan?
Payday loans as the name suggests are short term loans. The high fees and rates on payday loans make them a very costly way to borrow money. Payday loan borrowers can borrow between $100 and $1,500. You must repay these loans to the payday lending service on your next payday or paycheque, hence the name.
In Alberta, B.C., Manitoba, New Brunswick and Ontario you have up to 62 days to pay back the payday loan.
If you can’t afford to repay the payday loan on time, lenders will charge higher fees and interest rates. This will up your consumer debt load. Avoid payday loans when you’re low on funds.
Payday loans provide you with the money you need to cover a temporary shortage until your next paycheque. Because of the high interest rates and fees, avoid using them at all costs. If you use payday loans, you could find yourself in a vicious cycle of debt.
Payday loans go by another name, cash advances (similar to those offered by credit cards). Not only can payday loans hurt your credit score, you can find yourself in debt for a long time. Depending on the annual interest rates, the total cost of borrowing could be 75 percent of the loan or more.
Payday loans are offered by privately owned companies in brick and mortar locations as well as online.
The Ontario Government Capping Interest and Fees on Payday Loans
In the last section we introduced what payday loans were and how they can be bad for your financial health. But the reality of the matter is that despite how predatory payday loans may seem, they are allowed.
The Covid-19 pandemic has been tough on Canadians as a whole. However, it has hit vulnerable Canadians especially hard. A lot of these vulnerable Canadians regularly rely on payday loan to survive.
The Ontario government is proposing changes that would give Canadians extra protection. These changes, included in the COVID-19 Economic Recovery Act, 2020, provide extra protection by capping interest rates and fees on payday loans, ensuring that workers and families who rely on these services can keep more of their money in their pockets where it belongs.
The Ontario government says that it’s committed to helping protect the residents of Ontario during these unprecedented times, right now and in the future. The changes the Ontario government is proposing to the Payday Loans Act, 2008, are meant to help Ontario’s most vulnerable consumers by introducing maximum fees and other measures.
The Changes to the Payday Loans Act
Under the proposed changes to the Payday Loans Act, 2008, the interest rates payday loan lenders can charge on payday loans would be capped. Payday loan lenders would no longer be allowed to charge an interest rate higher than 2.5 percent per month (prior to compounding). This would provide some much needed debt relief to Canadians who are paying these fees and are having difficulty repaying these loans on time, adding to their debt load.
The Ontario government is also proposing introducing a $25 maximum fee that payday loan lenders can charge for dishonoured or bounced cheques. This additional protection would help borrowers from having to pay extra fees when they already find themselves in a tough financial situation.
The Ontario government says that it’s introducing these changes with the primary objective of making sure that the people of Ontario are able to look after their family in COVID-19 times and beyond without the additional stress of high interest rates and fees.
If this legislation passes, it would be the first time the province of Ontario has protected its residents from annual interest rates of up to 60 percent and introduced a maximum fee that can be charged for dishonoured payments. Ontario would be joining six other provinces that have similar maximum interest rate legislation, including B.C., Alberta, Saskatchewan, Manitoba, New Brunswick and Newfoundland and Labrador.
In addition, the Ontario government is also reviewing the Consumer Protection Act. This is the first review in nearly 15 years. It’s reviewing the Act to ensure vulnerable Ontarians that rely on alternative financial services are better protected.