Q.What are payday loans?
A. Payday loans are small, short term loans - $1500 or less, that must be repaid within 62 days, when the borrower receives their paycheque or other income. The average payday loan is about $280 and is repaid in two weeks.
A. Because payday loans are for a short term, lenders might not be able to recover their costs under the current interest rate maximum set in the federal Criminal Code - 60% per year, or about 2.3% for a two week loan. In addition, practices that are unfair to consumers and encourage repeat borrowing and spiralling debt need to be controlled.
To address this the federal government changed the law to allow provinces to regulate payday lenders – including maximum charges. BC made certain amendments and additions to the Business Practices and Consumer Protection Act and established the Payday Loans Regulation. The legislative changes require payday lenders to be licensed, sets the maximum charges, requires full disclosure in loan agreements, and regulates unfair practices that are harmful to consumers.
A. The Payday Loans Regulation took effect on November 1, 2009. At that time, all payday lenders doing business with BC consumers must be licensed with Consumer Protection BC – that includes lenders doing business over the internet and by telephone.
A. A payday lender may charge up to 23% of the principal of the loan. This amount must include all fees and interest except interest charged if the borrower defaults by not repaying the loan as agreed to in the loan agreement.
A. BC consulted fully with consumer groups and the payday loan industry, looked at research on current charges, costs and practices in the industry as well as the impact on consumers. BC also looked at maximum charges in other jurisdictions in Canada and the U.S. The impact of maximum charges and other regulated measures on consumers and businesses will be monitored and reviewed.
Q. How does the cost of a payday loan compare to the cost of an advance on a credit card or other bank credit?
A. The cost of a $300 payday loan taken for fourteen days at 23% of the loan principal would be $69, equivalent to 600% per year, far higher than a fourteen day cash advance on a credit card ($2.25 or 19.5% per year) or overdraft protection ($2.07 or 18% per year).
A. Consumers may be faced with an urgent need, such as a car repair, that doesn’t fit into their budget. They may not be able to get a short term loan or other form of credit from their bank.
There is a high demand for payday loans. The Payday Loans Regulation gives consumers access to these short term loans, while limiting the amount that can be charged. The Regulation requires lenders to give borrowers complete information about the costs of a loan, so borrowers can compare costs with a bank loan, or using a credit card.
A. Payday lenders must have posters showing the rates they charge, so that borrowers can easily compare rates with other payday lenders and with other types of lenders, such as banks.
Payday lenders must use a payday loan agreement that sets out all of the charges, terms and conditions of the loan. Borrowers have the right to change their mind and cancel the loan by the end of the following day, without paying any charges.
Practices which encourage deeper debt and dependence on payday loans are regulated. Payday lenders may not issue more than one loan to a borrower at the same time. They may not roll over one loan into another loan with new charges. Payday lenders may not issue a loan for more than 50% of the borrower’s paycheques or net income to be received during the term of the loan. If a borrower is taking their third loan in a two month period, repayment of the loan must be phased over two or three pay periods.
Other unfair practices are prohibited, such as collecting a repayment from an employer, getting unrestricted access to a borrower’s bank account, and requiring repayment dates before payday.
A. Yes, a borrower can always repay the loan any time before the due date. The lender must not charge extra for repaying the loan early.
A. Many lenders issue cash cards instead of cash for convenience and safety. A payday lender may charge extra for issuing a cash card, but total charges for the loan must include the cost of the cash card. The total of all charges must not be higher than 23% of the principal of the loan.
The payday lender must tell borrowers if they will be charged when they use the card, such as at an ATM or retailer. If there is $25 or less remaining on a cash card, the borrower can ask the payday lender to pay it out in cash.
Q. What can consumers do if they have been overcharged for a payday loan, or if they have a complaint about another aspect of a payday loan?
A. Consumers can check the website of Consumer Protection BC or they can telephone and get help with an enquiry or complaint.
Overcharging can result in a payday lender forfeiting all charges and only getting back the loan principal. Non-compliance with the law could lead to a lender’s licence being suspended or revoked, a penalty of up to $50,000 or a fine or imprisonment on conviction.
Q. How many outstanding payday loans can I have?