Another thing that will always be with us: lenders making high-interest, short-term loans to the poor, who will then struggle to pay them back. This leads to yet another eternal condition: impractical moral judgments about such loans.
In this year’s federal budget, the Liberals declared they were “cracking down” on “predatory lenders who can take advantage of some of the most vulnerable people in our communities, including low-income Canadians, newcomers, and seniors.” To this end, Budget 2023 reduces the maximum legal rate of interest and imposes a new lower national fee structure on so-called “payday” loans.
True, some borrowers—those who have decent credit scores, or are close—may soon find their borrowing costs slightly reduced. But millions of Canadians live from paycheque to paycheque with no hope of getting a loan at bank rates. When they suffer a financial crisis, they must either rely on friends or relatives to help them or seek more expensive sources of credit from non-bank lenders. Some of them choose to take out payday loans.
The Liberal government’s crackdown on legal, high-interest lenders will push many low-income borrowers into the hands of unregulated, illegal operators who charge much higher rates and regularly abuse their clients in ways that legal lenders do not. With its habit of virtue signalling while taxing and regulating heavily—and then showing no interest in enforcing the law against those who break it—the Liberal government is proving to be the black market’s best friend.
That is also the position of the Canadian Consumer Finance Association (CCFA), which represents the payday loan industry.
“Our members exist because there is a demand for credit that is not fulfilled by banks and other traditional lenders,” CCFA said in a statement.
Asked about the implications of the new, nationally imposed rate on payday loans of $14/$100 (these charges are levied in place of conventional loan interest), the CCFA predicts that “borrowers will lose access to licensed, legal lenders as more lenders exit the market and those that remain restrict their lending criteria.”
The group points to Newfoundland, which already has a limit of $14/100. “No company to our knowledge is solely a payday lender in NFLD,” the CCFA stated. “They would not be able to survive.”
While many Canadians might intuitively feel that payday loan rates are far too high and should be lowered—by legislation if needed—Ottawa’s plan to render payday lenders unprofitable will not improve consumer protection or resolve the underlying problem that many Canadians cannot get a bank loan or credit card. It will simply force them elsewhere in times of financial crisis—to illegal lenders, including online providers that charge vastly higher interest than payday lenders.
In the past, high-interest “loan sharks” used the threat of broken kneecaps or thumbs to extract repayment from troubled clients. The new breed of online collectors prefers verbal violence by phone. As one bankruptcy trustee said, “They will call your home, they will call your mother, they will call your boss.” Often hundreds of times a day. “They will keep badgering you until you pay.”
The need for high-interest, short-term loans has existed since the origins of money. It’s not going away simply because Ottawa declares these loans “predatory.” Rather, new government restrictions will encourage the supply of illegal, online loans from lenders that charge much higher interest rates and relentlessly harass their clientele.
It is yet one more example of how well-intentioned reforms can create unintended and perverse consequences. Sky-high taxes on tobacco have led to one-third of Canadian cigarettes being sold by smugglers and illegal manufacturers, who pay no taxes at all. Likewise, the legalization of cannabis came with so many new taxes and regulations that legal vendors are going bankrupt while the illegal market flourishes.
Always eager to strike a pose while ideologically opposed to the authority of market forces, the Liberals habitually refuse to think through the foreseeable consequences of their actions. Doing this kind of thing once is inept, though arguably forgivable; doing it, again and again, is negligent. The result is worse outcomes for legal businesses and their customers and a boon for criminals.
