ACORN wants the federal government to end predatory lending

You can get any number of loans from predatory lenders. But there's a cascading effect where folk end up paying fees, other loans, and getting into more debt that traps them in a vicious cycle.

“I took a few hundred dollars from Cash Money a few years ago. I was able to make regular payments until 2020 but since then everything has become so expensive. Because I haven’t been able to pay back, today I probably owe them close to $4,000. I am on disability, whatever I get goes into paying rent, there is no money left for food,” Toronto ACORN member Annmarie.

She went on to say, “I also owed some money to Capital One but because I was paying them regularly, they lowered the interest rate for me to close to 9 per cent for six months. I am feeling so stressed just thinking about the debt I owe. I cannot take care of myself and there is no money for personal care.”

This is just one of many lived experiences recorded by the Association of Community Organizations for Reform Now (ACORN) during its national study into short-term, low-cost credit options available to Canadians who are finding it impossible to make ends without access to fair credit.

Previous studies carried out by ACORN have shown that many low- and moderate-income people borrow from fringe lenders at ridiculously high interest rates because they are underbanked.

This current study revealed the extremely limited number of low-cost credit options available to low- and moderate-income folk makes financing debt exclusionary. ACORN is working to make it more inclusive.

The study included a review of existing literature that highlighted the nature, and extent, of debt among Canadian households. It also explored low-to-medium cost credit options offered by banks, credit unions, insurance companies, and Canada Post.

ACORN then conducted two national focus groups and sent an online survey to all of its members across the country. A total of 623 respondents completed the survey.  

ACORN has 24 neighbourhood chapters in 10 pan-Canadian cities. Established chapters are in British Columbia, Alberta, Ontario, New Brunswick, and Nova Scotia. Ontario had the most respondents.

Interest rates were defined using the Annual Percentage Rate (APR) with a low falling between 0 to 9 per cent; moderate 10 to 20 per cent; medium 21 to 30 per cent; high 31 to 45 per cent; and extremely high more than 45 per cent.

In Canada, interests rates above 60 per cent per year is illegal. Often referred to as loan-sharking, that 60 per cent rate includes fees and penalty payments.

The scan found that household debt is continuing to rise due to the ongoing effects of the pandemic and record inflation. That means more people are borrowing money.

The difference is that low- and moderate-income folk tend to use installment and payday loans, rather than mortgage debt, and those forms of borrowing generally come with much higher interest rates.

These higher interest lenders tend to be used because traditional banking institutions are inaccessible to this segment of the population.  

Recent studies also highlighted the fact that more Canadian households are financially on the edge with low-to-moderate income households, Indigenous communities, single parents, and folk experiencing income precarity being impacted the most.

ACORN’s national survey found that more than half of respondents are unable cover one month’s worth of expenses.

About 40 per cent would fall into debt if they experienced an unexpected $500 expense.

A total of 70 per cent of respondents are currently in debt, while 40 per cent said the pandemic and/or inflation was the cause of their severe financial hardship.

A total of 30 per cent needed to borrow money very often to monthly. While only 16 per cent never needed to borrow money.

Over 50 per cent of respondents had borrowed money in the last 12 months using their credit card (36%); payday or installment lenders (22%); and family members or friends (18%).

The main reason folk accessed high-cost lenders was to pay for everyday living expenses like rent and groceries, and for unexpected expenses like car repairs, medical expenses, pet expenses, or to improve their credit score.

Predatory lending uses compounding interest and refinancing to keep clients indebted forever. A third of respondents said that their loans had been refinanced multiple times. Another 20 per cent had refinanced at least once.

“I have had experience with all kinds of lenders – Money Mart, Cash Money and many others. They won’t let you know the full amount that you owe and then you notice the compounding interest and end up paying back three to four times [what] you took out!” said Geoffrey, an ACORN member from Halifax.

He went on to say, “It was really for day-to-day stuff that I had to go to them. Banks even don’t look at you when you have a bad credit score. I couldn’t even get $55 overdraft protection despite my credit score being high at the time.”

But making loan payments on time often means there’s little to no money left for basic necessities or paying other bills and that can lead to overdraft fees, reduced savings for retirement, as well as foregoing necessary medical appointments or prescriptions.

Respondents reported that not being able to make a payment, or only being able to make a partial payment, led to stress, anxiety and depression; more debt; a bad credit rating; and having to file for a consumer proposal or bankruptcy.

Approximately, 40 per cent of respondents said banks and credit unions were not helpful when they needed financial help.

Based on their findings and the grim financial future Canadians are facing, ACORN is calling for lower interest rates for predatory loans.

Their list of policy recommendations includes the federal government creating a federally funded Fair Credit Benefit for low-income folk to have access to low-cost credit options in cases of an emergency.

They also want the federal government to support postal banking like the now defunct MyMoney Loan and other alternative low-cost options similar to Desjardins Accord D financing, but without the exclusionary obligations of having a chequing account or Desjardins credit card.

Alternatives to payday loans are offered by credit unions, but effectiveness is limited to the areas they service.

Some provinces and cities have rent banks that provide loans and grants to help lower income tenants who have fallen behind on their rent or need help with a rental deposit. This has helped many individuals and families avoid becoming unhoused.

While all of these alternative sources of money for emergencies are helpful, to be impactful they need to be available right across the country.

ACORN believes the federal government needs to lower non-sufficient funds (NSF) fees from $48 to $10 per transaction, eliminate overdraft fees and ensure banks provide overdraft protection for all customers.

They want the federal government fulfill the promise made in the 2023 Federal Budget to cap the high interest rates predatory lenders charge clients. Ideally, ACORN would like to see predatory interest rates lowered to between 20 to 30 per cent plus the Bank of Canada rate.

At the very least, the government needs to lower the current 47 per cent APR to 35 per cent. It also needs to lower the 60 per cent Effective Annual Rate (EAR) to 42 per cent. Those caps need to include all fees and additional costs like insurance.

The last piece in the predatory lending puzzle would be for the federal government to enforce the existing regulations and make contesting violations easier for borrowers.

“I got into the cycle of payday loans a long time ago. You get any number of these loans from any number of these lending places. If I choose, I can go to four different loan agencies all at once and can get multiple loans. But once you get them, it has a cascading effect. It’s like cat and mouse, you are paying fees and other loans, and getting into more debt!

I was lucky enough to have someone who could lend me a few thousand dollars. Plus, I got in touch with ACORN and went to a townhall where there was also a DUCA credit union pilot program. DUCA changed the game for me from 42 per cent interest rate, it came down to 8 per cent interest rate.

When I started paying on time, it changed to 4 per cent. I was able to get a credit card.

I wish there was a product like DUCA that can stay and help people. Big banks don’t care, credit unions are my only hope.” – Hamilton ACORN member, Michael.

Epilogue:

Predetory lending lays bare the reality that Canada desperately needs a Guaranteed Standard of Living -- also known as a Guaranteed Livable Income or Basic Income.

Personally, it’s time to take ‘income’ out of the name because that opens the door for less progressive, more conservative governments to cut that income when we as a society make advancements like $10-a-day daycare or free transit or free dental and pharmacare.

A Guaranteed Standard of Living would include food, clothing, housing, and universal medical care, while maintaining, and expanding, all necessary social services. Money and services would be provided in amounts adequate to maintain the health and well-being of everyone living in Canada.

A Guaranteed Standard of Living would not be subject to cuts. In fact, it would leave room for recipients to remain in the workforce, look for more meaningful work, return to school to upgrade their skills, and live life with peace of mind confident that even if they find themselves unable to work due to disability, sickness, old age, or unemployment they will still have a standard of living that will enable them to thrive.

Learn why Hamilton City Council unanimously passed a motion calling on the provincial and federal governments to implement a Guaranteed Livable Income now.