The Short-Term Loan Client
Written by Cameron MacKay, Alberta Counsel
What We Offer
Currently 1 in 4 Canadians is underbanked. This means that 25% of us do not have access to the conventional banking and lending products that are available to other Canadians. Canadians with a credit score below 600, without credit, and considered middle-class are the prototypical short‑term loan consumer.
When life throws the other 3 Canadians a curveball, like needing a new set of car brakes or an abnormally high utility bill, they may resort to a credit card, line of credit, or savings. What would you do if you did not have access to these resources? In these circumstances, many Canadians will need to use a short-term loan from a company like Cashco. Cashco offers a place where they can borrow a small sum that is repayable at the regulated rate of $15 per $100 borrowed.
A perfect example when you can use a short-term loan would be high utility bills arising from cold weather that you are unable to pay. The reconnection fee and penalties can be costly. Obtaining a short-term loan for $300 to pay your utility bill makes sense, because the interest charge of $45 would be much less than the reconnection fee and late penalties associated with your utility bill. When these types of situations arise, 1 in 4 Canadians rely on a short-term loan to make ends meet.
In 2016, rules for short-term lenders changed. Alberta implemented the strictest legislation in Canada regarding short-term lending. The legislation, which came into effect in May 2016, saw the borrowing rate on every $100 drop from $23 to $15. The changes prohibited lenders from charging a fee to cash a payday loan cheque, prohibited soliciting customers directly by email or phone, and prevented companies from offering a loan when customers already have one outstanding with the company. Short-term lenders also must structure a short-term loan over 2 months rather than offering a traditional “payday” loan, among another 20+ regulatory changes.
How the Business Works
Cashco would like to be here to support Albertans. We exist to provide relief today and hope for tomorrow. However, for us to continue to exist, there needs to be a more sustainable model for short-term lenders and short-term consumers.
Currently, the business model is such that the rate of default on short-term loans is 15% and the regulated rate charge to the consumer is $15 per $100 lent. Imagine a scenario where $10,000 is lent and 15% is in default or $1,500 is not repaid. You are then left with $8,500 returned plus $1,275 for a loss of $255.
This is not a lucrative industry and is fraught with high risk and low return. As a result, short-term lenders must diversify into other product lines to survive, and most companies are closing their branches to achieve the economies of scale to endure within the current regulations. Short-term lenders are also much more selective with whom they lend. The other result is that the rate of loan rejection has increased substantially. Prior to 2018, the rate in which loans were rejected by the lender were below 10%. Now, 60% of loan applications are rejected by the lender due to the tight margins on the short-term loan product.
Why We Are Essential
Short-term lending is an essential service. After the COVID-19 pandemic, the immediate future will likely be one with higher than usual unemployment and greater fluctuation in incomes than before. Albertans will require options and short-term lending will be key to help Albertans manage the ups and downs of day-to-day finances to ensure that there is enough money today to pay the bills.
What Is the Path Forward?
The past regulatory changes have strengthened the regulations and offered some consumers an affordable product. Unfortunately for others, service has been restricted and many short-term lenders have closed their doors, are winding down operations, or do not offer short-term lending to a large cross-section of Albertans. If there are no amendments to the current regulations, there will come a point in time where there are no short-term lenders in the marketplace.
How can we match the needs of the short-term lender for a sustainable business model with the needs of Albertans for affordable and available lending products? One path forward is to have a sustainable model for short-term lenders and fair prices for consumers. What does this look like?
Our path forward comprises of two changes:
- Change section 124.3 of the Consumer Protection Act to allow payday loans which are repaid in less than 42 days. This amendment would reduce the administrative costs for short-term lenders and return a product that Albertans want.
- Work with credit reporting agencies to permit credit reporting on short-term loans so consumers can improve their credit.
These changes will improve access to consumers and ensure that short-term lenders can stay in business to offer an essential service that consumers need.