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The Financial Consumer Agency of Canada (FCAC, 2005) used an Ipsos Reid poll to determine
Canadian's experience with, and motivation for, using payday loan services. About 25% of
respondents reported using payday loans, and those most likely to have used the services were
men, those between ages 18 and 34, urban residents, residents of the four western provinces, those
with some post-secondary education, and those with household incomes less than $30,000 per
annum.
Stegman and Faris (2003) found payday borrowers in North Carolina were more likely to have
impaired credit histories, lower incomes, be African American, and have parents who did not have
a banking relationship than non-borrowers. The extensive report by Lott and Grant for the Public
Interest Advocacy Centre (2002) surveyed a random sample of Canadian households in 2001 to
ask about use of alternative financial services, including payday lending. Factors affecting use
included Canadian's increasing dependence on credit to finance consumption, and stagnating
incomes for most Canadians. They found a significant percentage (30%), were using the highly
costly rollover provisions of payday loans. They also note that borrowers would not turn to
extreme forms of lending such as loan sharks if payday lending was not available.
Why do people borrow from payday lenders?
Lott and Grant (2002) estimate that about 350,000 Canadians use payday lenders each year.
Reasons for using payday lenders include their fast and efficient service (money was needed
immediately), convenient hours and location, and the borrower's poor credit history and lack of a
bank account (FCAC, 2005). Buckland and Martin (2005) interviewed payday loan clients and
found that although they preferred mainstream services, they often found them difficult or
undesirable to access. Reasons given were “location and hours of operation, restrictions placed on
services, lack of respect and safety, and control and anonymity” (p.168).
Elliehausen and Lawrence (2001), using a national US sample, reported that 94% of payday
borrowers report having other options but choose payday loans instead and that 92% of customers
had favourable attitudes toward the experience. They also found that payday loan customers
earned between $25,000 and $50,000 per year and three quarters of them had a high school
diploma. It seems obvious that there are clear advantages for consumers in using these services,
that they are aware of the costs, and that a decision to use this service is rational.
Is payday lending “criminal” or “anti-consumer”?
Some critics believe that lenders target vulnerable, low income consumers, charge massive fees
and encourage the loans to be renewed, magnifying a modest loan into a back breaking debt
(Ciccone, 2006). Industry proponents, on the other hand, believe that a useful and desirable
financial service is being provided, that their customers are largely ignored by the mainstream
banks, and that the increased fees are a direct result of the increased risks firms bear when lending
to those with poor credit histories (Ciccone, 2006).
Most payday loans are small (under $1000) and are made for a term of two or three weeks.
Typical costs are about 20% of the value borrowed, with a borrower providing a post-dated cheque
for the loan amount and fees. For example, in order to get a loan of $300, the borrower must