Legalese_07-36

Jeff Green | Sep 13, 2007

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Payday Loans

by Peter Graham, Lawyer

Legalese is a column of general information and opinion on legal topics by the lawyers of Rural Legal Services, Box 359, Sharbot Lake, ON, K0H2P0, 613-279-3252, or 1-888-777-8916. This column is not intended to provide legal advice. You should contact a lawyer to determine your legal rights and obligations.

According to a recent government discussion paper, the annualized cost of borrowing of a typical payday loan is in excess of 400%. The average payday loan in Canada is approximately $300 with a term of 10 days to two weeks.

The payday loan industry in Canada has approximately 1,400 locations, which issue about $2 billion in loans annually. A payday loan is for a small amount and is made, without security, on the basis of the borrower providing a post-dated cheque or pre-authorized debit to the lender at the time of the loan. No credit check is performed but payday lenders typically require the borrower to prove three months continuous employment, produce a recent utility bill to establish an address and have an active chequing account.

On August 1, 2007, the Ontario government passed new regulations under the Consumer Protection Act requiring payday lenders to provide borrowers with clear and full information about the cost of borrowing. Although the government stopped short of limiting the amount the payday lenders could charge for the payday loans, the new regulations should help borrowers to understand the significant charges involved and to compare payday-lending costs to find the “best deal”.

The new regulations define a payday credit agreement as a loan not exceeding $1,500 for a term of not more than 62 days where the cash advance is made in exchange for a post-dated cheque, a pre-authorized debit or a future payment of similar nature.

To ensure that a borrower knows the amount he or she has to pay under a payday credit agreement, each payday lender must display a poster that is visible to borrowers immediately upon entering the lender’s place of business. The poster must set out the total cost of borrowing for each $100 advanced and an example of what it would cost to borrow $300 for 14 days.

In addition, the lender is required to deliver a copy of the payday credit agreement and advance the amount of the loan to the borrower no later than the time of entering into the agreement.

The payday credit agreement must contain:

The amount borrowed;

The length of the loan (the “term”) in days;

The total cost of borrowing expressed as a total amount;

The total cost of borrowing expressed as an annual percentage rate i.e. what the interest rate charged would be if the loan was for a year;

The total cost of borrowing expressed as an amount per $100 borrowed;

The total of all payments that the borrower is required to make in connection with the loan; and

The date on which the borrower is required to pay the total of all such payments.

If the payday credit agreement does not contain the information listed above and the borrower has paid any of the cost of borrowing, the borrower may demand a refund within one year of making the payment.

The new regulations will make sure that borrowers have all the information they need to understand how much a payday loan costs. As the regulations do not limit the amount that can be charged, it is up to borrowers to review and understand the information before taking the loan.

More detailed information may be obtained from the Ministry of Government Services website at www.gov.on.ca/mgs . Alternatively, do not hesitate to call the legal clinic with any questions you may have on the new regulations.