Toronto Payday Loans: What You Should Know
Overview of payday loans
As you're probably already well aware, in the general sense, payday loans are short term, high interest loans given out until the borrower's next payday. What you may not know is that payday loans in Canada have been specifically and narrowly defined as loans up to $1500 for a term of no more than 62 days. This is because until quite recently, loans issued for more than 60% annual interest were illegal under Canada's usury laws (see section 347.1 of the Canadian Criminal Code). Payday loans, using the definition above, were given an exemption from this law under Bill C-26 as long as the province in question had issued its own regulatory laws. In Ontario, this was acknowledged by the federal government in 2009.
Your options in Toronto
Toronto, being a major metropolitan center in Ontario, has the most options of any city in Canada. According to the Ministry of Consumer Services, Ontario has around 750 stores, the majority of which are within the borders of the Greater Toronto Area. In addition to storefronts, virtually every online lender also operates in Ontario, largely because Ontario is the largest province to allow payday loans, and also because they have the oldest regulatory regime. This presence of regulatory stability gives lenders additional confidence, especially in the wake of the sweeping class action lawsuits against payday lenders in the past 5 years.
Know the laws
In Ontario, interest rates have been limited to 21% of the principal. This is the second lowest maximum rate in Canada, although it is significantly higher than Manitoba which has opted for a rate of 17%, in addition to severely limiting interest rates on reloans.
Consumers have been granted a number of additional rights when taking out a payday loan in order to combat some of the perceived excesses of lenders in the past. The regulations are intended to protect borrowers from three primary classes of exploitation:
- unclear or intentionally misleading advertising
- trapping borrowers in an inescapable debt spiral
- abusive debt collection practices
Unclear or intentionally misleading advertising
Historically, the payday lenders sought to work around the usury laws by obfuscating the actual cost of the loan through a variety of clever machinations. These techniques included:
- Issuing a loan at 59% annual interest, but charging a cheque cashing fee. The loan could be paid off before the date on the post-dated cheque without incurring the fee, but this was impossible to exercise since the borrower had to write the cheque for the date of their next payroll.
- Charging an issuing fee with a fee taken in advance, so the customer would take out a (for example) $400 loan with $100 deducted at the time of issue, requiring the customer to repay $400 plus 59% annual interest.
- Requiring mandatory "insurance" on the loan at a fixed rate on the principal, usually over 25%.
These tactics served not only to provide a potential legal shield against prosecution under usury laws, but also limited the ability of the consumer to compare differing loan products.
Now all fees associated with the loan must be rolled into one single value called the "Total Cost of Credit", which must not exceed 21% of the total. In addition, NSF fees which were once unlimited have been capped at $50 per dishonoured payment, and clauses demanding legal fees have been deemed to only include the cost of filing and service.
Trapping borrowers in an inescapable debt spiral
One of the most common criticisms of payday lending practices is that of the so-called "rollover". In essence, although the exact execution varies, the idea is to automatically issue another loan to the borrower for the amount of the repayment if the repayment fails. As you probably remember from high school mathematics and exponential growth, this can get out of hand rapidly. In fact, if you start with a $100 loan and execute 26 rollovers (which would happen in one year with a common semi-monthly pay schedule) your $100 loan would turn into a $14204.29 loan at 21% per loan.
Rollovers are no longer allowed. Before a new loan may be issued, the payday loan company must have in its records proof of full repayment. This avoids another controversial practices known as a "replacement loan" where the lender gives the borrower the funds needed to repay the loan, then takes the repayment and follows it with a new loan simultaneously.
Abusive debt collection practices
In the event of a default, payday lenders have been (and still are) notorious for their less than ethical collection tactics. In possibly the most egregious case, a company in Pennsylvania staged fake courtroom trials to extract payment from debtors. Nothing that extreme has been reported in Toronto, but even there payday lenders historically repeatedly harassed friends and family, called debtors at their workplaces, and required borrowers to sign preemptive wage garnishing rights over to the lender. Another common practice was representing NSF cheques, or Pre-Authorized Debits, causing endless NSF fees.
Under the new laws, collection agencies and collectors (both first and third party) are forbidden from contacting the debtor at their place of employment more than once, may not represent a payment instrument if there is the possibility of incurring an NSF fee, and may not accept wage garnishing unless ordered by a court ruling.
Interest rates across Canada
Maximum Interest Rate