Explanation: How do payday loans work?

The annual percentage interest rate (APR) for payday loans is calculated by dividing the amount of interest paid by the amount borrowed; by multiplying the result by 365, dividing that number by the repayment term in days, and multiplying by 100. For example, for a two week loan charging $ 15 per $ 100 borrowed, the APR = (((15/100 ) x 365)) / 14) x 100 = 391%

Why can payday loans charge such high interest rates?

While the Criminal Code of Canada prohibits annual percentage rates above 60%, 2007 changes to the Code specifically exempt payday lenders rules that other lenders must follow.

To qualify for the exemption, payday loans must be of small amount ($ 1,500 or less), short-term (for example, for 62 days or less), and must be made in provinces that have chosen to regulate. payday lenders with legislation to “protect payday loan recipients and… specify a limit on the total cost of these loans.

Since the Criminal Code amendments allow provinces to set the maximum borrowing limit for payday loans, borrowers can face very different interest rates depending on where they live. In the nine provinces with active physical payday loan businesses, rates range from 391% per year (in five provinces) to 548% per year (in Newfoundland and Labrador, which is most recent province regulate payday lenders).

In Quebec, however, the government has set the maximum interest rate for payday loans at 35% per year, well below 60% ”.wear»Rate in the penal code. As a result, no payday lenders have set up shop in the province (although Quebeckers, like any other Canadian, can borrow from online payday lenders that do not have a physical presence in their province). of Quebec Consumer Protection Act requires a lender to have a license to operate in the province, and Quebec courts have ruled to grant licenses only if the creditor demands less than 35% per year because the loan is otherwise “unreasonable” under of the law.

Amendments to the Criminal Code were made in 2007, following the Canadian Payday Loans Association, which was formed in 2004 and is now the Canadian Consumer Finance Association, successfully lobbied for change.

Before changes to the Criminal Code and the subsequent development of regulations by provincial governments, payday lenders operated in a legal gray area. This is largely because they do not fit easily into the traditional “four pillars” of the Canadian financial system: banks, trust companies, insurance companies and brokerage firms. As the payday loan industry developed in the 1980s and 1990s, payday lenders feared being regulated or even sued (via consumer class actions) because they were clearly operating in violation of the law. interest of the Criminal Code. – rate limits.

To survive, payday lenders had to find a way to operate legally. According to Olena Kobzar, a social science professor at York University who completed her doctoral thesis on payday loans in Canada, that meant adopting some regulation. Passing the regulations, in turn, “meant convincing the federal government to amend the section of the Criminal Code that made payday lending illegal.”

Amendments to the Criminal Code took the form of Bill C-26, introduced to the federal Parliament in October 2006 and passed in May 2007. As, for example, an amendment to the Criminal Code of 1985 allowing provinces to exploit, To license and regulate many now decriminalized forms of gambling, the payday loan amendment was passed quickly and without public consultation.

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