Short-term loans, or payday loans as they are so often called, have come under increasing scrutiny around the world in the last few years, as a number of countries have adopted a tight regulatory hold of the sector.

In America, an agency that’s designed to protect consumers is attempting to create a country-wide law that governs the practices of payday lenders. In the UK, similar steps to regulate the industry have been taken, with the Financial Conduct Authority (FCA) introducing a number of steps to limit the cost of a payday loan. Interest and fees on all short-term credit loans have been capped at a daily rate of 0.8 percent of the original amount borrowed, and the total repayment amount including fees and interest has been capped at 100 percent of the original sum.

But here in Canada, it is the responsibility of individual providences to regulate the industry, and so far, this tactic has proved to be relatively unsuccessful. So, is it time the Canadian payday loans industry followed in the regulatory footsteps of the U.S. and the UK?

The American payday loan sector

In America, regulators are currently working to tighten the rules in the payday lending sector to protect some of the nation’s most economically vulnerable citizens. The Consumer Financial Protection Bureau has been charged with the task of creating the new regulations which could become a template for the way the industry is regulated in Canada.

The main thrust of the new regulations will be to put limits on the terms well-known U.S. payday lenders like Cash Store and CashMoney can apply to their loans. Currently, the ‘fast cash with no credit checks’ service they provide can come with interest rates that reach a staggering 500 percent, and in some cases more. 

A study of 15 million U.S. payday loans has found the average annual income of a borrower to be just $22,000USD, with these borrowers typically accessing 10 loans per year to help them get by. The average loan size was $350, while the fees were $458. Perhaps most worrying was the fact that 80 percent of these loans were renewed within two weeks, showing that many borrowers simply couldn’t afford to pay them back.

Are Canadian regulators doing enough?

In 2007, Canadian provinces were given powers to regulate the $2-billion industry, but critics of this system say that the limits, which are not applied country-wide, simply aren’t strict enough. The Canadian Payday Loan Association recognises more than 760 short-term lenders across the country, from leading payday loan lenders like Wonga, to many smaller, high-street operators that can prove to be more difficult to regulate.

In Canada, the average payday loan amount is currently $280, which is borrowed over a period of ten days. Most of these borrowers can be found in the province of Ontario, where the maximum a lender can currently charge is $21 for a loan of $100 over a two-week period.

Given these relatively low loan costs, Canada is clearly doing something right; however, it is still hoped that Canada will follow America’s lead and introduce national laws that tighten the sector further.