Canada is on the brink of a payday loan crisis. With rising missed credit card payments, looming job losses and a potential recession already underway, more Canadians will be forced to borrow just to cover basic needs.
Payday loans — short-term, high-interest loans meant to carry borrowers to their next paycheque — are often the last resort for those with no access to mainstream credit. While they offer fast cash, they come with sky-high costs that trap people in debt.
TD Economics predicts 100,000 job losses, and missed payments are on the rise. In past downturns, financially distressed Canadians have turned to payday loans, especially when emergency financial help wasn’t available. The signs suggest we’re about to see payday loan use spike again, and if that happens, governments and banks need to act now to protect vulnerable households.
Over the last decade, provinces have capped payday loan interest rates, and the federal government recently reduced the criminal rate of interest. These were steps in the right direction, but they haven’t solved the problem.
Even with caps in place, the current limit of $14 per $100 borrowed over two weeks translates to an annualized interest rate of 365 per cent. Lowering the rates didn’t make payday loans safe — just slightly less dangerous.
The root issue remains: low-income and marginalized Canadians still lack access to fair, short-term credit. That means even small financial emergencies — a rent increase, car repair or medical bill — can push them into the arms of payday lenders.
And they’re not borrowing for luxuries. According to Cardus research, “by far, the top three reasons for getting a payday loan are to pay for necessities, cover unexpected expenses, or avoid late charges on routine bills.”
Since government action alone hasn’t closed the gap, it’s time for Canada’s banks to step in.
The big five banks have pledged billions of dollars over the next decade to corporate citizenship projects — everything from cultural events to housing and environmental causes. But how much of that spending is helping Canadians avoid high-interest debt?
Banks don’t need to dip into their profits. They can simply redirect a portion of their existing corporate citizenship funding to provide small emergency loans at reasonable rates. For example, a $500 loan repaid over three months with fair interest would offer a manageable alternative to payday lending for people with no credit or collateral.
Governments, too, have an essential role to play. In the short term, they can boost public education campaigns to warn Canadians about the risks of payday loans before they walk through the door. Better-informed consumers are more likely to seek safer options.
Constituency offices should also be equipped to connect people with emergency support from rent banks, charities or faith-based organizations. Rent banks, for example, are community-based programs that offer interest-free loans or grants to help people avoid eviction and housing instability.
Longer term, financial literacy education needs a major upgrade. Provinces should bring financial professionals into high schools to teach debt management, budgeting and savings habits.
The urgency is clear: households where the primary income earner is 15 to 24 are six times more likely to use payday loans than those headed by someone 45 or older
Finally, governments need better data. We still don’t have a clear picture of who uses payday loans, why they borrow and how much debt they carry. Without that research, policymakers are flying blind.
Canada is heading into rough economic waters. An increase in payday loan use is likely. But governments and banks don’t need to watch this crisis unfold. They can act now — and they must.
Renze Nauta leads work and economics research at the non-partisan think tank Cardus.
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