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Study: Payday loans

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The Daily

Friday, April 20, 2007

In 2005, a small minority of Canadian families (almost 3%, or about 353,300) reported having taken out a payday loan within the previous three years, according to a new study.

The study found that age was a key factor. After controlling for other family characteristics, young families were three times more likely to have used payday loans than those that had a major income recipient aged 35 to 44. These families appear to have few other options to get out of their financial straits.

This study, published today in the April issue of Perspectives on Labour and Income, examines the characteristics and behaviours of payday loans borrowers, using first-ever data on these loans from the 2005 Survey of Financial Security.

Payday loans are part of the growing alternative consumer credit market in Canada and are offered by lenders other than banks or other regulated financial institutions. These loans are extremely expensive cash advances, usually for relatively small amounts, generally $100 to $1,000, and usually for a short term, with repayment on or before the next payday.

The convenience makes them attractive. But concerns have been raised about questionable practices within the industry, including high borrowing costs, insufficient disclosure of contract terms, and unfair collection practices.

In addition to age, financial attributes were also related to the use of payday loans, even after controlling for other characteristics. Families with little savings or no credit cards, particularly those who had been refused, were significantly more likely to have used payday loans.

Without these options and faced with financial shortfall, these families may have turned to payday loans in an effort to bridge the gap between pay cheques.

The study found that families behind in bill or loan payments were more than four times as likely to have used payday loans, even after controlling for other key characteristics such as income and savings.

Four in 10 families who borrowed money through payday loans had spending that exceeded income, substantially more than families who had not used payday loans. These factors indicate a relationship between financial difficulty and the use of payday loans.

Almost half of families who used payday loans reported that they had no one to turn to if they faced financial difficulty, significantly higher than for non-users (32%). More than one-quarter reported that they could not handle an unforeseen expenditure of $500, almost four times the rate for non-users. Nearly half could not handle one of $5,000 (17% for non-users).

Mainstream methods such as using savings or lines of credit were mentioned less frequently by these families.

Definitions, data sources and methods: survey number 2620.

The article "Payday loans" is now available in the April 2007 online edition of Perspectives on Labour and Income, Vol. 8, no. 4 (75-001-XWE, free) from the Publications module of our website.

For further information, or to enquire about the concepts, methods or data quality of this release, contact Wendy Pyper (613-951-0381;, Labour and Household Surveys Analysis Division.