Predatory payday loans a product of inefficient banking system, says UTM professor

The COVID-19 pandemic has put in sharp focus the outrageous interest rates and fees payday lenders charge their customers, leading to calls for government intervention.

On April 15, Mississauga Mayor Bonnie Crombie sent a letter to the province asking them to address the predatory practices of payday lenders, noting she had heard reports they are charging up to 390 per cent in annual interest.

“With increasing numbers of people turning to payday lenders right now, I worry that far too many people will find themselves in severe debt after this crisis that, itself, will prove to be irreversible,” Crombie said in a streamed press conference. “I am asking the province to review the lending criteria, specifically, lowering the level of interest and altering the terms to make them easier to pay back.”

Andreas Park, an associate professor of finance at U of T Mississauga, says such annualized interest rates are what payday lenders have always charged.

“It’s reprehensible,” he says. “It’s a scandal they exist.”

While it’s horrible that these lenders exist at all, they are around for a reason, Park continues. “They exist because of a monumental failure of the banking system.”

Banks don’t provide the needed products and services to people, especially the poor who are often unable to access credit. There’s a reason these lenders are generally found on almost every street corner in poorer neighbourhoods. They provide a service to those who can’t wait for a cheque to clear, don’t have access to a line of credit, a credit card or an overdraft fund.

For many, payday lenders are the only way to get a loan, Park says, and those who turn to them “pay through the nose.”

“Wealthy people design the world to work for them,” he says.

The exorbitant interest rates and fees charged by these lenders have made headlines recently, with calls for stricter regulation, especially during the pandemic when more people are likely to turn to payday loans to make ends meet.

Park says there needs to be more advocacy for people at the bottom of the financial system, but says he won’t hold his breath that the recent attention will lead to change. He explains people are currently aware of the problem because many are feeling the effects of the pandemic, but when things start to look better it will only be the poor who care. They are, after all, the ones most affected by payday lenders.

The issue with payday loans is complex, and much of it can be traced to systemic issues. For example, there’s a need to increase financial literacy, which is a public policy failure, Park says, arguing financial literacy should be a high priority.

“People have so much debt and understand so little,” he explains, noting students in elementary school in Germany understand interest rates.

Another part of the problem is a technological failure. Park says it’s ridiculous that cheques are still used for payment, which take time to clear. When he moved to Canada from Europe in 2003 he hadn’t used a cheque in a decade, but found everything here was by cheque. Rent had to be paid by cheque because it wasn’t possible to simply transfer money.

There is currently a multi-year payment modernization initiative in Canada, Park says, that could modernize the system and allow for real-time payments and change how money flows through the financial system.

Ultimately, Park says he’d like to see payday loans gone completely, but bigger systematic issues need to be addressed first.