Shift to Larger, Longer-Term Loans Adding to Debt Burden
KITCHENER, ON, Feb. 19, 2019 /CNW/ - Despite legislative changes to reduce consumer risk, payday loan use among heavily indebted Ontarians continues to rise. Updated research by Licensed Insolvency Trustee firm Hoyes, Michalos & Associates Inc. reveals that almost four in ten Ontario insolvencies in 2018 involved payday loans.
"Regulatory changes to lower the cost of payday loans and lengthen the period of repayment are not working for heavily indebted borrowers who feel they have no other option but to turn to a payday loan," says Ted Michalos. "And the industry itself has just adapted, trapping these consumers into taking out more and even bigger loans, adding to their overall financial problems."
In 2018, 37% of all insolvencies involved payday loans, up from 32% in 2017 making this the seventh consecutive increase since Hoyes Michalos' initial study in 2011. Insolvent borrowers are now three times more likely to use payday loans than they were in 2011.
"The problem is payday loans have changed. Payday lenders have gone online, making access easier and quicker. Even more concerning, payday loan companies now offer a wider array of products, including high-interest, fast-cash installment loans and lines of credit. We see the use of larger fast-cash loans increasing, to the detriment of borrowers." adds Doug Hoyes. "At the same time, heavy users circumvent rules to limit repeat use by visiting more than one lender, and there are no safeguards in place preventing them from doing so."
The average insolvent payday loan borrower owes $5,174 in payday loans on an average 3.9 different loans. In aggregate they owe two times their total monthly take-home pay on loans with interest rates typically ranging from 29.99% to 59.99% for longer term loans and 390% for traditional payday loans.
The average individual payday loan size increased in 2018 to $1,311, a 19% increase over 2017, the result of easy access to higher dollar loans. In 2018, 15% of all individual payday loans were for $2,500 or more, up from 9% in 2017 and barely 1% in 2011.
"Current legislation fell short," says Ted Michalos. "It is not limiting the ability of heavily indebted borrowers to obtain credit well beyond their ability to repay."
To provide additional protection for consumers and reduce excessive payday loan use, Hoyes Michalos & Associates Inc. recommends that payday lenders be required to:
- Report all short-term loans to credit reporting agencies, so all lenders are aware of existing payday loans. We believe this will also help borrowers improve their credit score when they repay existing payday loans.
- Discontinue the use of introductory teaser rates that only serve to entice a borrower onto the payday loan cycle.
- Provide overly indebted borrowers with information on all their debt management options including a consumer proposal and bankruptcy.
"Heavily indebted borrowers need a more robust debt management solution," adds Doug Hoyes. "They cannot borrow their way out of debt. The earlier they speak to a professional like a Licensed Insolvency Trustee, the more options they have available to get those debts under control and the sooner they can recover financially so they are not reliant on payday loans at all."
More information can be found at https://www.hoyes.com/press/joe-debtor/how-insolvent-borrowers-use-payday-loans/.
About Hoyes, Michalos & Associates, Inc.
Hoyes, Michalos & Associates Inc., a Licensed Insolvency Trustee firm co-founded by Doug Hoyes and Ted Michalos in 1999, has established itself as the leading voice on personal debt issues in Ontario. Hoyes Michalos provides real debt management solutions to help Ontarians climb out of debt, including consumer proposals and personal bankruptcy, with offices throughout Ontario. Further information is available at www.hoyes.com
SOURCE Hoyes, Michalos & Associates Inc.