Pay ME! Payday loans under the microscope
Monday, January 15, 2007
Legally, you are not allowed to charge more than 60 per cent interest on any loan. If you do, it is defined as a criminal rate of interest. Several companies have recently come under scrutiny after it was found that the combination of service fees and other charges effectively make the interest rate much, much higher than advertised. In some cases, interest rates have been calculated to be as high as 780 per cent APR(Annual Percentage Rate). On average, a $500 payday loan for two weeks would end up costing the borrower $650 to repay.
A class action lawsuit, of which the Statement of Claim was issued on January 28, 2005, is currently underway against one online payday loan company, Quik Payday Inc. A class action lawsuit is when one case represents many people. In this case, the “people” means everyone in Canada who took out a payday loan from Quik Payday between October 2nd 2002 and February 11th 2005.
The settlement, which has now received court approval, calls for the now defunct Quik Payday to liquidate its assets and put the money into a fund that will be used to pay back a portion of the fees and interest to previous customers, provided they met all of their terms of the agreement.
In another case in Windsor, Ontario a judge has certified another class action suit for $515 million from Money Mart and its parent, Dollar Financial Group.
Parliament is currently looking at a bill that would regulate payday loans in Canada, but it has not yet gone entirely through the system. Once it does, it will allow the provinces to regulate interest rates more closely and impose penalties on companies that are found in violation.
Of primary concern is the fact that, according to one study, about 91 per cent of payday loans are made to repeat customers. This means that people who are already having serious financial trouble are getting slapped with the highest rates of interest. In the end, many of these customers end up paying more in fees and services charges than they receive from their employment pay cheque.