You see them on practically every street corner in lower class neighbourhoods across every city in the country. They promise cheque cashing services and “low cost” short term loans to people who fall through the cracks of the traditional banking system, people without bank accounts, new immigrants and social welfare recipients. Come January some will also offer tax preparation for these same, lower middles class “working poor”.
Over the last decade or so they have begun to creep into middle-class neighbourhoods as well with their slick contemporary designed outlets, prepaid credit cards, international wire transfer services and even more enticements to borrow now and pay next week.
Ask anyone who works at one of these outlets and they will tell you that they provide an essential service. They are the only place a lot of people without bank accounts can go to have cheques cashed and receive emergency funds. Most traditional banks will not provide service to people without an account and in order to get a bank account in most cases you must have either a Social Insurance Number, a job, Citizenship or other form of permanent residency status, in some cases all of the above. That puts a lot of people, refugees, new immigrants and social welfare recipients in particular, outside the traditional banking system and in need of financial services. I get that, but the fact of the matter is that these Cheque Cashing services and PayDay lenders don’t make their huge profits from cashing cheques for immigrants; they make their money by charging upwards of 500% annual interest on short term loans to the working poor!
There was a time in my life when I fell into their trap. I was living beyond my means in a 1700 square foot town-house that I couldn’t afford but rather than take the necessary steps to reduce my expenses I sought the help of a payday lender. At one point I was playing two different outlets off of one another to the tune of over $700 every two weeks! I even bounced a repayment cheque to one of them and when I finally was able to repay it I was told “that’s okay, you’re one of our best customers”.
Ouch – that was the final straw, I knew at that point that I needed help and even though they thought they were giving me a compliment, I was insulted and never went back. I shudder to think just how much I really paid interest and what they really thought of me.
Of course they don’t call it interest they call it a “convenience fee” and bury the true interest rate in the fine print. One PayDay Lender I used to deal with advertises “$300 for $20” but let’s take a look at what they really means in terms of the interest rate charged.
According to Ontario law payday loans must be paid in full every two weeks. That means that the $300 you borrow, plus the $20 is due no more than 14 days from when you took it out. If you roll that over and take out another $300, plus $20 for another two weeks you will have paid $40 in fees on the same principle of $300 in a month, you haven’t actually made any progress on your debt, you’ve just paid the fee. But wait, that $300 for $20 deal is only good for your first loan, after that the actual rate is $100 for $20 so if you roll it over you are now paying $60 every two weeks to keep your $300 principle balance. Keep doing that and over the course of a year you will pay $1460 is “fees” on a principle balance of $300, which is an effective annual interest rate of 438%!
And those are the “reputable” guys, I’m sure you’ve seen their ads on billboards and television with their cute mascot and catchy jingle. They are a national brand owned by Multinational Corporation that trades on the TSX. But there are literally hundreds of other small players in the market with less than stellar reputations to protect. Do you really think these companies honestly believe they are providing an essential service to the working poor? It blows my mind how they can keep a straight face, and tell you that 438% interest is really just a convenience fee and an essential service for unbanked and working poor!
It’s no secret. I hate PayDay Lenders. They are nothing more than legalized loan sharks. We as a society need to find a better way to help the unbanked population. Cheque cashing services for immigrants, refugees and social welfare recipients is one thing but we don’t need to offer short term, high interest loans to anyone.
For more information on how I got out from under the PayDay Lender and my proven system for getting out of debt, building wealth and leaving a legacy – “6 Steps to Financial Freedom” write to: firstname.lastname@example.org