insight

Payday loans: market trends

Evidence type: Insight i

Context
The study
Key findings
Points to consider

Context

Despite the high cost of credit – up to 546% APR – 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 FCAC's approach to educating consumers about the cost of payday loans and alternatives to payday loans.

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

Demographics: 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.
Understanding costs: Only 43% of participants knew that payday loans were more expensive than credit card advances.
Size and number of loans: 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.
Methods of repayment: 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. 70% of respondents repaid the loan with their pay cheque, but 13% paid with savings, 7% with a further payday loan, and 7% by borrowing from friends or family.
Reasons for loans: Most loans (86%) were for necessary expenses. 45% were for unexpected 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.
Household savings and budgeting: 37% felt that they could not cover expenses for a month if they lost their income; 17% could not cover a week. 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. This reflects other research indicating that people will often resort to more expensive credit rather than savings earmarked for another purpose (Sussman et al, in press) and highlights the need for better understanding of building and using savings. 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%).
Financial literacy and seeking advice: 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 report notes that the findings suggest that many people are taking out payday loans when they could use cheaper sources of credit and so highlights the need for better 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

Methodological limitations: The report notes that respondents were part of a national panel and so is not necessarily representative of payday loan users, but that conclusions can be drawn.
Generalisability/ transferability: The survey reflects experience and regulatory frameworks in Canada but may provide useful insights or comparison with the UK.