Canadian Payday Loan Study: Meeting Our Needs

In a short period of time, the payday loan has become a popular means to deal with unexpected financial shocks between paychecks. In her payday loans piece for Statistics Canada’s “Perspective On Labour and Income” online journal, Wendy Pyper profiles the growth of the consumer loan product and the financial strategies in play when consumers decide to use them.

Rapid growth to meet unaddressed need

From the 1990s to the time of Pyper’s study in 2007, roughly 200 faxless payday loan outlets in the United States blossomed to around 22,000, with an annual loan volume of $40 billion (Ernst and Young 2004; Kirchhoff 2006). A similar growth pattern occurred in Canada, where a few stores became about 1,200 in 2004 (Kitching and Starky 2006, 4). These numbers obviously pale in comparison to the gigantic banking establishment, but the number of transactions performed by payday loan companies is significant (Ramsay 2000, 4).

Relatively high costs and clear disclosure are issues Canadian critics have raised (Canada 2006; ACORN Canada 2004), but on a practical level, many families value the convenience and don’t have a problem with the product. And the costs are much less than the closest alternative for those in need: depending upon checking overdraft.

Why do consumers like payday loans?

Families borrow money for different reasons. Like many of us, they encounter difficulties from time to time that make it impossible to meet all of their financial obligations with what they have on hand. It could be due to health, a broken down car, family emergency or most anything else with real short-term implications. Realistically, money management is also a factor. How we save and how we spend have a tremendous impact upon our financial well-being.

Pyper explores the question of why people take faxless payday loans rather than going to a traditional bank. Convenience, location, operating hours and approval speed are determining factors (Environics 2005), as is the reality that banks and credit unions have for the most part failed to serve certain communities and clientele with less than perfect credit (ACORN 2004, CMC 2002).

The blush of youth

Looking at Pyper’s Canadian sample, fully one-quarter of families who were payday loan borrowers had a major income recipient aged 15 to 24, compared with only six percent who were not. Similarly, payday loan families less frequently had a major income recipient 45 or older. Based upon her findings, young families were three times more likely to have used payday loans.

Why more often with younger families? If there are children, expenses can be stretched to more challenging levels, but the statistical impact as this relates to using payday loans was – in Pyper’s findings – not significant. Some sources even suggest that the greater the education level, the less likely consumers would be to use the product. However, Pyper’s findings run contrary to this assertion.

Payday loans, income and liquid savings

Pyper had this to say regarding family income findings:

Low-income families (after tax) were fully twice as likely as those not in low income to have used payday loans—4.6 percent compared with 2.3 percent. A further breakdown shows that families with higher incomes had significantly lower incidence of using payday loans—1.4 percent for those above $66,000 versus three percent for those between $40,001 and $66,000.

Liquid assets and whether the borrower was a homeowner did prove to be significant to the payday loan use equation. The greater the assets held, the less likely people were found to call on payday loans. Moreover, renters were found to be three times more likely than homeowners to use the product.

Payday loans: less costly than credit cards

Families who were without a credit card were more likely to have had a payday loan in Pyper’s study. In fact, for those who had been unable to obtain credit in that way, respondents were three times more likely to have used faxless payday loans instead. Unfortunately, the revolving debt trap credit cards pose could have been avoided if customers had relied upon payday loans for their short-term credit needs. After the typical two-week period, a loan could have been repaid with only an additional 15- to 30-percent outlay.

A very real need

Pyper’s findings are impossible to ignore. Nearly half of families who used payday loans reported that they “had no one to turn to for financial assistance in the face of financial difficulty, significantly more than other families (32%).”

As many of us are experiencing greater than normal financial challenges during the current recession, having the ability to responsibly rely upon a product like the payday loan is extremely valuable. Consumers who need a quick solution to a financial emergency can take advantage of the speed, convenience and discretion the products provide, without the worry of constantly spiraling debt that credit cards can easily introduce.