Payday loans unfortunately fulfilling a need within our society

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Even the more libertarian minded, like myself, tend to believe there’s a place for government when it comes to protecting those unable to help themselves.  Though we’re inclined to say those capable of looking after themselves need to face the consequences of their decisions.

Things get trickier with people in between – those who feel as though they’re choosing between a rock and a hard place and are vulnerable by circumstance rather than ability.

Enter the payday loan industry.  We see these establishments around town advertising how quickly and easily they can hand over wads of cash.  The ever-so-fine print telling you how much these services cost in fees and interest reveals how much of a rip-off they are, yet they still exist and tend to thrive.

It’s apparent in where these businesses operate and how they market themselves that they target a particular demographic – people who either don’t know better or have exhausted all other avenues.

Whether it’s a few hundred or a few thousand dollars, you’ll get it.  But it will cost you, and the sticker shock might not fully set in until later.

This happened with an Alberta senior in 2007.  Dorothy Cardinal needed $3,150 to hire a lawyer to file a compensation claim after she was injured, as a passenger, in a car accident.  The lawyer advised against getting a payday loan, but she needed the money.

The monthly interest rate in the first year was 42 per cent, followed by 47 per cent in year two and 27 per cent a month in subsequent years.  Nine years on, the balance on her $3,150 loan was $43,355.  This week, Alberta’s Court of Queen’s Bench slashed it to $8,572, calling the original terms “unconscionable,” according to a Blacklock’s Reporter story.

There are admittedly some peculiarities with the situation, such as why the lawyer who supposedly opposed the payday loan route didn’t agree to take his payment, perhaps even with modest interest, out of Cardinal’s victim compensation.  Or why Cardinal herself didn’t pay the loan off with money she received.  (It’s not clear in the decision how much, if anything, she ultimately got.)

Cardinal argued in court as a high school dropout who’d never had a credit card, she was “not sophisticated or knowledgeable in the ways of business.”  She also said her “limited finances and credit rating” prevented her from getting a bank loan.

Cardinal’s case illuminates the ickiness of these enterprises taking back nearly 14 times what they loaned out.  Even after nine years this is absurd.  But the case tells us that she had a financial need in her life that only a payday loan could fulfill.

Despite ongoing efforts to either ban or severely restrict these types of businesses, I’ve yet to see a lawmaker answer what people who’ve been so desperate as to need them are to do.

You don’t need to be an accountant or have an MBA to know that nothing in life is free, least of all money itself.  I’m sure even Ms. Cardinal must have known this on some level, even if she didn’t fully grasp the permutations of compounding.

The sad reality is that nearly half of Canadians, according to a January study, are less than $200 away from not being able to meet monthly expenses.  An unexpected car repair or dental emergency may be the difference between going into debt or not.

Ideally, people have an emergency pool of money for such an event.  Or perhaps they have a credit card they can use then pay off over the next few paychecks.

One has to assume that someone going to a payday loan shop doesn’t have this safety net, and has exhausted all other lower-cost methods of financing, whether it’s borrowing from a friend or taking out a conventional bank loan.

People who need to resort to payday loans are also the highest risk borrowers; hence lenders need to charge high rates to offset others’ defaults.  Shockingly – or perhaps not – one-quarter of Canadian payday loans initially default.

This is why patrons have to pay an arm and a leg for the privilege of borrowing a finger.

Critics of my free-for-all position will say that we need to deal with the root causes of poverty driving this cycle that requires predatory lending in the first place.  I agree with that, though it doesn’t solve the here and now problem to which this industry offers a solution, however imperfect.

Andrew Lawton is a fellow at the True North Initiative and a Loonie Politics columnist.

More from Andrew Lawton.     @andrewlawton

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