On my daily commute I drive by a loan agency, usually packed with people lined up to the door. It’s the same situation when I drive home hours later — lots of people, patiently waiting to get their hands on some cash. I ask myself, how can this one store be so busy? Whatever this lender offers must be pretty valuable … It’s a popular place.
As if a beacon, the sign in the window rhythmically blinks on and off, “Pay Day Loans”. Attracting those looking for fast easy money. I always thought Pay Day loans were a short-term solution, meant to bridge the gap between money needed now and a borrower’s upcoming paycheck. However, in reality many who enter find it hard to get out— often stuck in the Pay Day trap for months at a time.
We’ve Got Hostages… Now Show Me Your Hands…
Oxford Dictionary state’s Pay Day loan as “a relatively small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next wages.” In Ontario, residents can receive up to $1500 instantly by providing proof of income and pledging repayment upon receipt of their next check. Sounds easy, so what’s the catch?
At face value a Pay Day loan seems innocent. It’s meant to help the borrower bridge finances until they get paid. However, this type of borrowing is problematic and can become a vicious cycle. Often the borrower will take out larger loans to pay back old ones in order to cover principle and increasing interest payments, all while trying to use the loan to still cover basic necessities like food. This situation worsens when the loan continues to grow until the borrower is unable to repay, visiting another Pay Day lender to pay back the first, where the cycle repeats ad nauseam.
Through reading this, people might think those who get stuck in the Pay Day trap are there of their own accord. I mean it’s a reasonable assumption. Everyone knows that Pay Day loans are among the highest interest of any loan available. If you don’t have the money to pay back a loan, don’t take one out in the first place, be smart and borrow responsibly.
The issue is that for many of those who visit Pay Day lenders there are no other options.
Traditional banks usually don’t lend small amounts of money. Furthermore, these banks want some sort of security to leverage the loan. Where does a renter go with no credit history? Where do those go who don’t earn enough? What if they need the money now? What if the situation is URGENT? Banks take days to process loans applications and the paperwork is daunting. What if you applied and were declined? Well that’s embarrassing – and you still need to find a loan.
Pay Day to the rescue. You mean all I need is a steady paycheck? Even if I lost my business and went bankrupt, you’ll still give me money? You mean I can get the money now? You’ll count it out in front of my face? How convenient. There are many circumstances that can lead someone to borrow from a Pay Day lender. These are regular people stuck in a cycle of borrowing that can become devastating, quick. Instead of shaming them, shouldn’t we be compassionate to their plight? How can we help? What can we do?
It’s time to call the hostage negotiator…
Some Canadian provinces, like Alberta, are speaking up against the system. They are imposing new interest restrictions that seek to limit the pervasive 560% annual interest rate. In 2014, the Ministry of Consumer Services started a review of Pay Day legislation in Ontario. Nothing has happened yet — we need to speak out! Next, education is important. Those who need loans should know there are other options. If you or someone you know is struggling, contact us, we’ve helped many stuck in the cycle get on the right path.