What Happened After One U.S. State Banned Payday Loans

There’s good debt and bad debt…and then there are payday loans. These short-term lending products can charge annual interest rates of 546 per cent (or more), and can leave borrowers trapped in a vicious cycle of taking out new loans to pay off their old ones. Case in point: an Ottawa man who borrowed $1,400 in payday loans ended up over $10K in debt.

From the Financial Consumer Agency of Canada, here’s how much interest you’d pay on a $300 payday loan after two weeks, compared to some other alternatives:

Some provinces have adopted legislation to limit how much lenders can charge for a payday loan. In 2016, Alberta lowered this amount to $15 for every $100 borrowed. Last year, B.C. dropped its maximum fee to $17, and at the start of 2018, Ontario followed Alberta’s lead in cutting it to $15, which still amounts to a 391 per cent annual interest rate. But one U.S. state went even further, dropping the allowable interest rate so low that it put payday lenders out of business.

A place where lenders can charge no more than 36 per cent

When South Dakotans went to the polls in 2016, they weren’t just voting on a new president. Initiated Measure 21 proposed a limit of 36 per cent annual interest on short-term loans. It passed in a landslide, with over 75 per cent support.

Now, 18 months later, payday lenders are all but extinct in the Mount Rushmore State. The new restrictions made payday loans unprofitable—instead of charging $10 interest after one week on a $100 loan, lenders could only charge 75 cents of interest. But some South Dakotans are still using payday loans, and they’re borrowing from online lenders.

The danger of online lenders

Supporters of IM21 believed that banks or credit unions would get more business from short-term loans after the measure passed. But Jeff Olson, CEO of the Credit Union Association of the Dakotas, told a local news reporter that the only boost in traffic came from customers who needed cash to settle their payday loans…because their soon-to-be-closed lender was demanding full payment.

Instead, Olson believes that many people are turning to online payday loans, which don’t have to follow the laws or limits of any particular state (or province). What’s more, these online payday lenders can gain access to a borrower’s bank account and make withdrawals without warning—or explanation.

Borrower beware: Online lenders could gain access to your bank account and make withdrawals without warning. Click To Tweet

Online loans in Canada still have higher interest rates than banks

A quick Google search for “payday loans” pulls up ads for online lenders like 24cash.ca, Mogo, Easy Financial and Captain Cash. These lenders might not charge 400 per cent interest…but their rates are much higher than your local bank.

For example, Captain Cash charges an annual interest rate up to 34.4 per cent on loans that must be repaid over 90 to 120 days. It also charges a $45 fee for any missed payment. MogoMini claims to be “89 per cent cheaper than a payday loan,” saying it charges “about 13 cents a day” in interest per $100 borrowed. This clever calculation works out to be almost 48 per cent in annual interest charges. More disturbingly, Mogo offers access to more credit as a reward for making timely payments.

Although they’re not nearly as noxious as payday loans, it’s easy to see how these short-term online lenders could keep Canadians trapped in a constant cycle of debt. Find out how to stop the cycle by visiting our Payday Loans page.