Putting yourself further in debt is hardly the best solution for getting out of poverty, but for some people, it’s the only option available.
When economics professor Laura Lamb conducted her research into who uses payday loan companies and why they use them, some of the results were not what she expected.
In 2012, Lamb sat on a committee tasked with looking at financial issues in Kamloops. In the committee’s meetings, fringe finance institutions like payday loan companies became a recurring theme. Often, because of their high interest rates, these institutions are rarely seen as a good thing.
Though many studies have looked into loan company use before, research into their use in the Thompson-Okanagan was lacking.
“Over time there has been more of them in Kamloops,” Lamb said. “They have been growing in numbers and we were starting to wonder who uses them and why they are using them, and that ultimately led to the study of their use here.”
In order to tackle the issue, Lamb needed data. Over a period of three weeks, Lamb, with the help of two of undergraduate students, interviewed 105 people on their banking habits, attitudes towards financial institutions and financial literacy.
“What my research did that past research had not, was add on a financial literacy quiz, the same one used by Statistics Canada,” Lamb said. “All of these other studies mention financial literacy programs as solutions, but there never seems to be any actual proof that financial literacy is the issue, it just seemed to be an assumption.”
Since Statistics Canada conducts a financial literacy quiz as part as their national survey, Lamb had no shortage of data to compare to her results.
“Of the people on the survey who use fringe financial institutions, their average [financial literacy quiz score] was lower than the Canadian average,” Lamb said. “Yet when I adjusted for education and income levels, there wasn’t any statistically significant difference between those who use fringe finance and those who do not.”
Despite 76 per cent of the respondents having mainstream bank accounts, many of them cited their use of loan companies as a result of having no other options. Many payday loan users, as Lamb put it, enter a “vicious cycle” of having to continually take out loans to make ends meet.
Lamb’s research also discovered that fringe finance use is much higher amongst the Aboriginal population than the non-Aboriginal population.
“Unfortunately our Aboriginal population falls in the lower demographics for income and education, so I did expect it to be higher than the 10 per cent representation of the city, but the fact that 42 per cent of respondents were Aboriginal was quite surprising,” Lamb said.
Though Lamb is still looking into solutions, she is sure that heavy regulation won’t fix the problem.
“In some states in the U.S., the strategy was to set maximum interest rates. The max interest rates were low enough that these companies couldn’t make a profit and left, and that forced people into the hands of loansharks,” Lamb said. “I think the solution is to provide a better service at a more reasonable cost. To regulate these institutions out isn’t helping the people who use them.”
In the eyes of the Manitoba Government, however, regulation is key to helping consumers make better financial decisions. In October 2010, Manitoba passed some of the strongest payday loan legislation in Canada in order to help prevent borrowers from falling into a cycle of debt.
Unlike B.C.’s maximum fee limit, which sits at $23 per $100 borrowed, Manitoba’s maximum limit is $17 per $100 borrowed. In cases where a payday lender issues a loan to a borrower within seven days of another payday loan in Manitoba, the maximum limit is dropped to $5 per $100 borrowed.
Though B.C.’s current legislation is not sufficient to protect public interests, Lamb suggested that any further regulation needs to be looked at with caution.
“Perhaps a better way to go is credit unions, because their policies are set at the local level,” she said. “Because they are local, unlike chartered banks, they’re able to make better connections with people.”