Ottawa’s crackdown on payday loans will help Canada’s black market

Commentary

You will always have the arms with you. (Matthew 26:11)

Another thing that will always be with us: lenders who give high-interest short-term loans to the poor, who will then struggle to pay them back. This leads to yet another eternal condition: impractical moral judgments about such loans.

In this year’s federal budget, the Liberals declared they were “cracking down” on “predatory lenders who can take advantage of some of the most vulnerable people in our communities, including low-income Canadians, newcomers and seniors.” To this end, the 2023 Budget lowers the maximum statutory interest rate and imposes a new lower national rate structure for so-called payday loans.

It is true that some borrowers – those who have a decent credit score or are close – will soon find that their borrowing costs are slightly lower. But millions of Canadians live from paycheck to paycheck with no hope of a loan at bank rates. When going through a financial crisis, they must either rely on friends or relatives to help them or seek more expensive sources of credit from non-bank lenders. Some of them choose to take out payday loans.

The Liberal government’s crackdown on high-interest legal lenders will push many low-income borrowers into the hands of unregulated, illegal operators who charge much higher rates and regularly abuse their customers in ways that legal lenders do not. With its habit of signaling virtue while heavily taxing and regulating – then showing no interest in enforcing the law against those who break the law – the Liberal government proves to be the best friend of the black market.

According to a recent survey according to Statistics Canada, more than a quarter of Canadians say they can’t cover an unexpected expense of $500. Likewise, 8 million adult Canadians are considered “non-prime” borrowers due to bad credit scores. A significant portion of the Canadian population cannot just walk into a bank and get a loan when they need it. So it may make sense to go to an alternative lender that charges apparently exorbitant rates.

That is also the position of the Canadian Consumer Finance Association (CCFA), which represents the payday loan industry.

“Our members exist because there is a demand for credit that banks and other traditional lenders don’t meet,” CCFA said in a statement.

When asked about the implications of the new nationally mandated $14/$100 payday loan fee (these fees are levied in lieu of conventional loan interest), the CCFA predicts that “borrowers will lose access to licensed, legal lenders as more lenders market and those who remain limit their lending criteria.”

The group points to Newfoundland, which already has a cap of $14/100. “As far as we know, no company is a sole lender in NFLD,” the CCFA said. “They couldn’t survive.”

While many Canadians might intuitively feel that payday loan rates are far too high and should be reduced – if necessary through legislation – Ottawa’s plan to make payday lenders unprofitable will not improve consumer protection or solve the underlying problem that many Canadians do not get a bank loan or credit card. It will simply force them elsewhere in times of financial crisis – to illegal lenders, including online providers that charge much higher interest rates than payday lenders.

In the past, high-yield “loan lenders” used the threat of broken kneecaps or thumbs to get repayments from troubled clients. The new breed of online collectors prefer verbal abuse over the phone. As one curator said, “They call your house, they call your mom, they call your boss.” Often hundreds of times a day. “They keep harassing you until you pay.”

The need for high-interest short-term loans has been around since the inception of money. It’s not going away just because Ottawa declares these loans “predatory.” Rather, new government restrictions will encourage the supply of illegal, online loans from lenders who charge much higher interest rates and relentlessly harass their customers.

It is yet another example of how well-intentioned reforms can have unintended and perverse consequences. Skyrocketing tobacco taxes have resulted in a third of Canada’s cigarettes being sold by smugglers and illegal manufacturers, who pay no taxes at all. Similarly, the legalization of cannabis brought so many new taxes and regulations that legal sellers are going out of business while the illicit market is thriving.

Always ready to strike a pose while ideologically opposing the authority of market forces, the liberals usually refuse to consider the foreseeable consequences of their actions. Doing this sort of thing once is awkward, though arguably forgivable; doing it over and over is negligent. The result is worse for legitimate businesses and their customers and a boon for criminals.

The original, essay-length version of this article was recently published in C2C journal.

The views expressed in this article are the views of the author and do not necessarily reflect the views of The Epoch Times.