Explained: How do payday loans work?

The annual effective annual interest rate (APR) for payday loans is calculated by dividing the amount of interest paid by the amount borrowed; multiplying the result by 365, dividing that number by the length of the repayment term in days, and multiplying by 100. For example, for a two-week loan charging $15 per $100 borrowed, the APR = ((( 15/100) x 365 )) / 14) x 100 = 391%

Why can payday loans charge such high interest rates?

While the Criminal Code of Canada prohibits annual percentages greater than 60%2007 amendments to the Code specifically exempt payday lenders rules that other lenders must follow.

To qualify for the exemption, payday loans must be small ($1,500 or less), short-term (for example, 62 days or less), and must be made in provinces that have chosen to regulate payday lenders. payday loan with legislation to “protect recipients of payday loans and…specify a limit on the total cost of these loans.”

Since changes to the Criminal Code allow provinces to set the maximum borrowing limit for payday loans, borrowers can face very different interest rates depending on where they live. In the nine provinces with active physical payday lending businesses, rates range from 391% per year (in five provinces) to 548% per year (in Newfoundland and Labrador, which is the most recent province regulate payday lenders).

In Quebec, however, the government has set the maximum interest rate for payday loans at 35% per year, well below 60%.wear» rates in the penal code. As a result, no payday lenders have set up shop in the province (although Quebecers, as well as all other Canadians, can borrow from online payday lenders that do not have a physical presence in their province). of Quebec Consumer Protection Act requires a lender to have a license to operate in the province, and Quebec courts have decided to grant licenses only if the creditor charges less than 35% per annum because the loan is otherwise “unreasonable” under the law.

Amendments to the Criminal Code were made in 2007, after the Canadian Payday Loans Association, which was created in 2004 and is now the Canadian Consumer Finance Associationsuccessfully lobbied for change.

Until amendments to the Criminal Code and the subsequent development of regulations by provincial governments, payday lenders operated in a legal gray area. This is largely because they do not fit easily into the traditional “four pillars” of the Canadian financial system: banks, trust companies, insurance companies and brokerage houses. As the payday loan industry grew in the 1980s and 1990s, payday lenders feared being regulated or even sued (via consumer-initiated class action lawsuits) because they clearly operated in violation of the interests of the Criminal Code. -rate limits.

To survive, payday lenders had to find a way to operate legally. According to Olena Kobzar, a social science professor at York University, who completed her doctoral thesis on payday loans in Canada, that meant adopting some regulation. Passing the regulations, in turn, “meant convincing the federal government to change the section of the Criminal Code that made payday loans illegal.”

Changes to the Criminal Code took the form of Bill C-26, introduced in the federal Parliament in October 2006 and passed in May 2007. Such as, for example, a 1985 Criminal Code amendment allowing provinces to exploit, Licensing and regulating many forms of now decriminalized gambling, the Payday Loans Amendment passed quickly and without public consultation.

About Judith J. George

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