Normally I never read the Vancouver “Free” 24 hour news paper, but on the front page of todays issue, it made me stop and look, so I read it. Why? The topic of financial institutions who loan and set interest rates on money, has always fascinated me. The more I dive into this murky world of money, the more I am drawn into the human nature of how people treat and manage “their” money. The sub-caption read: “Cheque-mate, Is now the time to regulate payday loans?” I agree on one level, that yes, strict regulations should be in place; however, those who believe that businesses should be operated free from government interference and that “they” should be their own regulators, is currently the dominate opinion throughout this industry. And why not! If you were a business owner, wouldn’t you want to self-regulate your practises of every facet of your business at all times? But could our current provincial and federal governments actually do this, and make all parties involved–happy?
The problem that many academics (and the Vancouver, 24 hours news papers) state, is that the poor are always the disadvantaged. In the case of low-income people who take personal pay-cheque loans, and then find themselves unable to pay off the loan within the required time, and then forced to “roll-over” the dept into another loan, extending it, while incurring administration fees, and interest on top of it–get in the news. But why and how do some people get into this state, while most don’t–such as the majority of wage earners who have sound financial housekeeping and seem to manage their money quite well?
What I find repulsive about this argument is, most who argue, only see the deck-of-cards as “stacked” against the person who goes to a Pay Day Loans company, and yet they do not see the reasons why these people go to these financial institution in the first place? Within the small group of people that I know of, many are using these business because they are no longer welcomed by the larger Charted Banks. What I have found is, the credit data-bases that are used by the Charted Banks are not shared with the Pay-Day loans companies; therefore, the credit histories and passed debts are not seen by either of the two groups. So for someone who has a “blemished” credit history, and they must cash their pay cheque, the place to go to is a cheque cashing institution who does not know your credit history.
However, cheque cashing institutions charge a hefty premium for their services–somewhere along the three percent rage. They will charge you $0.03 per every $1.00 every time you want cash from a standard bank note. Now, if you wanted a loan, then you would need to back yourself up with some guarantee that you will pay it back–like your next pay cheque; you will need to borrow against your next pay cheque, with interest rates as high as 30 to 59 percent to get the loan. If you cannot pay off the loan within the next pay period, then the service charges and interest fees really kick in, and they call this a “role-over.” Hey, they are assuming the risk, and high risk involves high interest rates for that service. **Remember that the Criminal Code of Canada states that it is a criminal offence to charge interest, per year, of 60 percent or higher.
The problem is not that these business exist, it is that the people who otherwise could not get loans from Charted Banks, and who are living from pay cheque to pay cheque, are going to borrow when they cannot afford to. These people who have a high risk of not paying back the money that was loaned to them, go into debt, with the cheque cashing lenders. There is a market niche for high risk loans, with huge profits, and the argument is–they are taking advantage of the poor. The interesting fact that I have found, along with other various scholars, is that these people are willing to pay the high premiums for their loans; and most do pay back all of the money to their lenders–on time. Only a small number of borrowers never pay back their loans. If a person who has no experience, or does not know how to properly manage their money, then they are at risk of heading into this “spiral,” that is almost guaranteed in becoming a “hole” that they may never be able to dig themselves out from. I do see a need for regulations; however, how and where the government places those regulations, and how industry responds to those regulations is the key issue.