With the new payday loan rules announced Monday, the provincial government has taken an important step towards reining in an industry that for too long has been out of control.
For the first time, lenders will have to be licensed, undergo a criminal record check and post their charges and fees prominently in their offices. And they won't be allowed to garnishee wages or make more than one loan at a time to a customer.
Even so, the new limit that payday lenders are allowed to charge for short-term loans amply illustrates why British Columbians should use these services only as a last resort.
On the kind of short-term loan payday lenders typically make, they cannot charge more than 23 per cent of the principal for a two-week loan. That rate translates into total charges of 600 per cent on an annual basis.
B.C.'s new regulations were made possible after the federal government gave provinces the authority to regulate the payday loan industry, which had to that point been largely unfettered since prosecutors seemed unable or unwilling to use the Criminal Code provisions to crack down on interest rates that clearly exceeded the mandated limit of 60 per cent per year.
With 23 per cent for a short-term loan, B.C. has landed in the middle of caps being set by other provinces. Nova Scotia allows 31 per cent and Manitoba just 17 per cent. The new rate should be reviewed as mandated in a couple of years.
While such high rates are defended on the basis that short-term loans to relatively high-risk customers are expensive to provide, most people who have other options will look elsewhere.
Even relatively high-cost credit card debt is a fraction of the cost of a payday loan, and conventional short-term bank loans, such as through a revolving line of credit or even overdraft protection on a current account, are far less expensive.
But as credit counsellors can attest, people don't always make the best choices with their money. Sometimes they simply don't know any better. A survey of payday loan customers in Manitoba found that a third believed they were paying less than they would have if they had used their credit cards.
So new rules that require payday lenders to clearly tell their customers how much their loan will cost should be a benefit.
In addition, however, the province should look at whether we are doing enough in the K-12 school system to foster financial literacy.
It's not enough just to give children the skills they need to earn a living. They also have to learn how to get value out of the money they earn.
But many people are willingly paying the high cost of payday loans because they perceive, rightly or not, that they don't have access to traditional banking services.
The banking crisis, which is causing lenders to look even harder at potential clients, won't help.
But even in the current harsh climate, banks and other financial institutions should be encouraged to look at why people -- most of whom also have accounts in banks -- are taking their business to payday lenders despite the higher rates they charge.
For the first time, lenders will have to be licensed, undergo a criminal record check and post their charges and fees prominently in their offices. And they won't be allowed to garnishee wages or make more than one loan at a time to a customer.
Even so, the new limit that payday lenders are allowed to charge for short-term loans amply illustrates why British Columbians should use these services only as a last resort.
On the kind of short-term loan payday lenders typically make, they cannot charge more than 23 per cent of the principal for a two-week loan. That rate translates into total charges of 600 per cent on an annual basis.
B.C.'s new regulations were made possible after the federal government gave provinces the authority to regulate the payday loan industry, which had to that point been largely unfettered since prosecutors seemed unable or unwilling to use the Criminal Code provisions to crack down on interest rates that clearly exceeded the mandated limit of 60 per cent per year.
With 23 per cent for a short-term loan, B.C. has landed in the middle of caps being set by other provinces. Nova Scotia allows 31 per cent and Manitoba just 17 per cent. The new rate should be reviewed as mandated in a couple of years.
While such high rates are defended on the basis that short-term loans to relatively high-risk customers are expensive to provide, most people who have other options will look elsewhere.
Even relatively high-cost credit card debt is a fraction of the cost of a payday loan, and conventional short-term bank loans, such as through a revolving line of credit or even overdraft protection on a current account, are far less expensive.
But as credit counsellors can attest, people don't always make the best choices with their money. Sometimes they simply don't know any better. A survey of payday loan customers in Manitoba found that a third believed they were paying less than they would have if they had used their credit cards.
So new rules that require payday lenders to clearly tell their customers how much their loan will cost should be a benefit.
In addition, however, the province should look at whether we are doing enough in the K-12 school system to foster financial literacy.
It's not enough just to give children the skills they need to earn a living. They also have to learn how to get value out of the money they earn.
But many people are willingly paying the high cost of payday loans because they perceive, rightly or not, that they don't have access to traditional banking services.
The banking crisis, which is causing lenders to look even harder at potential clients, won't help.
But even in the current harsh climate, banks and other financial institutions should be encouraged to look at why people -- most of whom also have accounts in banks -- are taking their business to payday lenders despite the higher rates they charge.
