Bill C28 supersedes the Criminal Code of Canada for the purpose of exempting Payday loan companies from the law, if the provinces passed legislation to govern payday loans. Payday loans in Canada are governed by the individual provinces. All provinces, except Newfoundland and Labrador, have passed legislation. For example, in Ontario loans have a maximum rate of 14.299% Effective Annual Rate ("EAR")($21 per $100, over 2 weeks). As of 2017, major payday lenders have reduced the rate to $18 per $100, over 2 weeks.
The "Financial Conduct Authority (FCA) estimates that there are more than 50,000 credit firms that come under its widened remit, of which 200 are payday lenders. Payday loans in the "United Kingdom are a rapidly growing industry, with four times as many people using such loans in 2009 compared to 2006 – in 2009 1.2 million people took out 4.1 million loans, with total lending amounting to £1.2 billion. In 2012, it is estimated that the market was worth £2.2 billion and that the average loan size was around £270. Two-thirds of borrowers have annual incomes below £25,000. There are no restrictions on the interest rates payday loan companies can charge, although they are required by law to state the effective "annual percentage rate (APR). In the early 2010s there was much "criticism in Parliament of payday lenders.
In 2014 several firms were reprimanded and required to pay compensation for illegal practices; "Wonga.com for using letters untruthfully purporting to be from solicitors to demand payment—a formal police investigation for fraud was being considered in 2014—and Cash Genie, owned by multinational "EZCorp, for a string of problems with the way it had imposed charges and collected money from borrowers who were in arrears.
Changes in the UK law
On 1 April 2014 there was a major overhaul in the way payday loans are issued and repaid.
First of all the FCA will be making sure all lenders can abide by two main goals;
- "to ensure that firms only lend to borrowers who can afford it", and
- "to increase borrowers' awareness of the cost and risk of borrowing unaffordably and ways to help if they have financial difficulties".
On top of the main goals Martin Wheatley, the FCA’s chief executive officer, said:
- “For the many people that struggle to repay their payday loans every year this is a giant leap forward. From January next year, if you borrow £100 for 30 days and pay back on time, you will not pay more than £24 in fees and charges and someone taking the same loan for fourteen days will pay no more than £11.20. That’s a significant saving.
- "For those who struggle with their repayments, we are ensuring that someone borrowing £100 will never pay back more than £200 in any circumstance.
- "There have been many strong and competing views to take into account, but I am confident we have found the right balance.
- "Alongside our other new rules for payday firms – affordability tests and limits on rollovers and continuous payment authorities – the cap will help drive up standards in a sector that badly needs to improve how it treats its customers.”
In order to achieve these goals the FCA has proposed the following:
- Initial cost cap of 0.8% per day,
- Fixed default fees capped at £15, and
- Total cost cap of 100%.
Payday loans are legal in 27 states, and 9 others allows some form of short term storefront lending with restrictions. The remaining 14 and the District of Columbia forbid the practice. The annual percentage rate ("APR) is also limited in some jurisdictions to prevent usury. And in some states, there are laws limiting the number of loans a borrower can take at a single time.
As for federal regulation, the "Dodd–Frank Wall Street Reform and Consumer Protection Act gave the "Consumer Financial Protection Bureau (CFPB) specific authority to regulate all payday lenders, regardless of size. Also, the Military Lending Act imposes a 36% rate cap on tax refund loans and certain payday and auto title loans made to active duty armed forces members and their covered dependents, and prohibits certain terms in such loans.
The CFPB has issued several enforcement actions against payday lenders for reasons such as violating the prohibition on lending to military members and aggressive collection tactics. The CFPB also operates a website to answer questions about payday lending. In addition, some states have aggressively pursued lenders they felt violate their state laws.
Payday lenders have made effective use of the sovereign status of Native American reservations, often forming partnerships with members of a tribe to offer loans over the Internet which evade state law. However, the Federal Trade Commission has begun the aggressively monitor these lenders as well. While some tribal lenders are operated by Native Americans, there is also evidence many are simply a creation of so-called "rent-a-tribe" schemes, where a non-Native company sets up operations on tribal land.
Variations and alternatives
Alternatives to payday loans
Other options are available to most payday loan customers. These include "pawnbrokers, "credit union loans with lower interest and more stringent terms which take longer to gain approval, employee access to earned but unpaid wages, credit payment plans, paycheck cash advances from employers ("advance on salary"), auto pawn loans, bank overdraft protection, cash advances from credit cards, emergency community assistance plans, small consumer loans, installment loans and direct loans from family or friends. The Pew Charitable Trusts found in 2013 their study on the ways in which users pay off payday loans that borrowers often took a payday loan to avoid one of these alternatives, only to turn to one of them to pay off the payday loan.
If the consumer owns their own vehicle, an auto title loan would be an alternative for a payday loan, as auto title loans use the equity of the vehicle as the credit instead of payment history and employment history.
Other alternatives include the Pentagon Federal Credit Union Foundation (PenFed Foundation) Asset Recovery Kit (ARK) program.
Basic banking services are also often provided through their postal systems.
Comparisons payday lenders make
Payday lenders do not compare their "interest rates to those of mainstream lenders. Instead, they compare their fees to the "overdraft, late payment, penalty fees and other fees that will be incurred if the customer is unable to secure any credit whatsoever.
The lenders may list a different set of alternatives (with costs expressed as APRs for two-week terms, even though these alternatives do not compound their interest or have longer terms):["citation needed]
- $100 payday advance with a $15 fee = 391% APR
- $100 bounced check with $54 NSF/merchant fees = 1,409% APR
- $100 credit card balance with a $37 late fee = 965% APR
- $100 utility bill with $46 late/reconnect fees = 1,203% APR
Variations on payday lending
A minority of mainstream banks and TxtLoan companies lending short-term credit over mobile phone text messaging offer virtual credit advances for customers whose paychecks or other funds are deposited electronically into their accounts. The terms are similar to those of a payday loan; a customer receives a predetermined cash credit available for immediate withdrawal. The amount is deducted, along with a fee, usually about 10 percent of the amount borrowed, when the next direct deposit is posted to the customer's account. After the programs attracted regulatory attention, Wells Fargo called its fee "voluntary" and offered to waive it for any reason. It later scaled back the program in several states. Wells Fargo currently offers its version of a payday loan, called "Direct Deposit Advance," which charges 120% APR. Similarly, the "BBC reported in 2010 that controversial TxtLoan charges 10% for 7-days advance which is available for approved customers instantly over a text message.
Income tax "refund anticipation loans are not technically payday loans (because they are repayable upon receipt of the borrower's income tax refund, not at his next payday), but they have similar credit and cost characteristics. A car "title loan is secured by the borrower's car, but are available only to borrowers who hold clear title (i.e., no other loans) to a vehicle. The maximum amount of the loan is some fraction of the resale value of the car. A similar credit facility seen in the UK is a "logbook loan secured against a car's "logbook, which the lender retains. These loans may be available on slightly better terms than an unsecured payday loan, since they are less risky to the lender. If the borrower defaults, then the lender can attempt to recover costs by "repossessing and reselling the car.
Many countries offer basic banking services through their postal systems. The "United States Post Office Department offered such as service in the past. Called the "United States Postal Savings System it was discontinued in 1967. In January 2014 the Office of the Inspector General of the United States Postal Service issued a white paper suggesting that the USPS could offer banking services, to include small dollar loans for under 30% APR. Support and criticism quickly followed, however the major criticism isn't that the service would not help the consumer but that the payday lenders themselves would be forced out of business due to competition and the plan is nothing more than a scheme to support postal employees.
- "Alternative financial services
- "Community Financial Services Association of America, a trade association representing the payday loan industry
- "Debt bondage
- "Loan shark
- "Logbook loan
- "Merchant cash advance
- "Predatory lending
- "Refund anticipation loan
- "Title loan
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- $15 on $100 over 14 days is ratio of 15/100 = 0.15, so this is a 14-day rate. Over a year (365.25 days) this 14-day rate can aggregate to either 391% (assuming you carry the $100 loan for a year, and pay $15 every 14 days: 0.15 x (365.25/14) = 3.91, which converts to a percentage increase (interest rate) of: 3.91 x 100 = 391%) or 3733% (assuming you take out a new loan every 14 days that will cover your principal and "charge", and every new loan is taken at same 15% "charge" of the amount borrowed: (1 + 0.15)365.25/14 − 1 = 37.33, which converts to a percentage increase (interest rate) of: 37.33 x 100 = 3733%).
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