"They say they are helping people who can't get help anywhere else. We need to ensure that people with poor credit, debt and low incomes have real alternatives to get assistance, rather than being handed a shovel to keep digging." — James Clancy, NUPGE National President.
Ottawa (03 March 2015) — Subprime lending. Payday loans. Now we have installment loans. Just another way to drive people who are already struggling financially further into debt.
Short-term, unsecured, high-interest loans create more financial troubles
When people are struggling financially, they look for support. Sometimes they can turn to their bank. But for those with little income and poor credit, this isn't an option. People used to get pay day loans to tide them over until the next pay cheque comes in. There has been much publicity over the last five years about the downward spiral that these loans can cause, especially due to the predatory interest rates. Many provinces have been moved to set ceilings on interest rates — which are still too high — because of public and government concern.
But as banks refuse to play a role in helping people in short-term need, the void is being filled by companies offering installment loans.
How do installment loans work?
While payday loans and installment loans have many things in common, the biggest difference is in the amounts that can be borrowed, and the repayment timeline. Instalment loans allow you to borrow up to $15,000 with repayment periods of up to three years. CBC's investigation into this new loan scheme shows that the audience that is being targeted is people with low-income, poor credit or a high debt load. Many of these businesses are setting up storefronts in the same depressed neighbourhoods that payday loan companies have already targeted.
Some quick cash stores have had to shut down due to the caps on the interest rates, providing room for these new predatory lenders. These lenders are less than transparent about the costs to take out a loan. Some loans are offered with insurance and the costs quickly add up with the principle repayment, plus interest. CBC is reporting that the interest rates are bordering on the criminal. Criminal interest rates are anything over 60 per cent.
The installment loan companies benefit from their customers not understanding fully the financial terms of the agreements they sign. They also employ people to contact customers to offer to increase their loan amount, and repayment schedule.
According to Equifax, a credit monitoring company, instalment loans are the second-fastest growing type of debt in Canada, behind auto loans, accounting for a total of $132 billion owed, or 8.7 per cent of Canada’s total debt distribution.
Alternatives to predatory loans
"The unfortunate thing is that banks could actually play a role to help people cope with their financial situations," said James Clancy, National President of the National Union of Public and General Employees (NUPGE). "Instead, they are turning their backs on people who live in their community, forcing them into the hands of these loan sharks."
"Obviously, we need better regulation of these types of loans and caps on interest rates, the way most provincial governments have done with payday loans," Clancy continued. "These businesses are preying on the rising income inequality in Canada and profiting from other people's suffering. They say they are helping people who can't get help anywhere else. We need to ensure that people with poor credit, debt and low incomes have real alternatives to get assistance, rather than being handed a shovel to keep digging."
The National Union of Public and General Employees (NUPGE) is one of Canada's largest labour organizations with over 340,000 members. Our mission is to improve the lives of working families and to build a stronger Canada by ensuring our common wealth is used for the common good. NUPGE