Context

Despite the high cost of credit (with APRs of up to 546%) 4% of Canadian households used payday loans in 2014, up from 2% in 2009. Regulation of payday lenders varies by province and continues to evolve with the market. Payday loans may be worth up to CAD (Canadian Dollar) 1,500 and must usually be repaid by the next payday. This study was undertaken to inform the Financial Consumer Agency of Canada (FCAC's) approach to educating consumers about the cost of payday loans and alternatives.

The study

The survey aimed to better understand payday loan users (who they are and what drives their decisions) to inform the design and promotion of consumer education materials. It was an online survey of 1,500 Canadians who had used a payday loan in the previous three years. Participants were randomly selected from a panel of people registered to take part in online surveys.

Key findings

• Payday loan users were not only from low-income households. While 70% of borrowers lived in households with incomes below CAD 80,000 (the national median family income was CAD 78,870 in 2014), 20% reported incomes above that level and 7% above CAD 120,000.
• Only 43% of participants knew that payday loans were more expensive than other available alternatives.
• 55% of loans were for CAD 500 or less and 75% were for CAD 1,000 or less. 7% of participants reported loans of over the legal maximum of CAD 1,500. The survey was unable to determine the reasons for this response. 29% had taken out one payday loan in the preceding three years, while 37% had taken out two to five and 23% six or more. In most provinces rolling over loans is illegal, and borrowers must seek a different lender.
• Some borrowers repaid loans with sources of funds other than their pay cheque, which suggests that they may not appreciate the higher costs of payday loans. While 70% of respondents repaid the loan with their pay cheque, one-in-seven (13%) paid with savings, 7% with a further payday loan, and 7% by borrowing from friends or family.
• Almost half of all payday loans (45%) were for unexpected expenses and 41% for expected expenses. 17% were to avoid late charges on other bills and 7% to buy something special. The report notes the value of building even small emergency savings to avoid expensive loans.
• 37% felt that they could not cover expenses for a month if they lost their income; 17% could not cover a week. Almost half (47%) of participants had no cash savings. Even among those with savings of over $1,500, only about 45% would use them to pay such expense of $500, with a third preferring to use a credit card. Although respondents were more likely than the wider population to have a household budget (64% compared with 46%), they were less likely to stay within them (72% compared with 93%).
• Participants who had taken out fewer loans and managed to keep to their household budget tended to judge themselves as more financially literate. 27% never sought financial advice even when they felt they needed it, and 45% “sometimes” did.

The findings suggest that many people are taking out payday loans when they could use cheaper sources of credit, highlighting the need for enhanced awareness of costs. Frequent recourse to payday loans highlights the need to build emergency savings funds, while the relatively low use of independent financial advice underlines the need to promote such services.

Points to consider

• The report notes that respondents were part of a national panel and so is not necessarily representative of payday loan users.
• The survey reflects experience and regulatory frameworks in Canada but may provide useful insights or comparison with the UK.

Full report

Payday loans: Market trends - full report

Note: the report will shortly more to a new location at Canada.ca