New loan fund hopes to break heavy payday loan cycle

Ottawa residents who depend on expensive payday loans to cover unforeseen expenses now have a much more affordable alternative. The Causeway Work Center, a nonprofit in Hintonburg, unveiled its new community fundraising fund on Friday in an upbeat launching ceremony.

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Ottawa residents who depend on expensive payday loans to cover unforeseen expenses now have a much more affordable alternative.

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The Causeway Work Center, a nonprofit in Hintonburg, unveiled its new community fundraising fund on Friday in an upbeat launching ceremony that was filled with positive energy and optimism.

“I think we’re on the verge of making a transformational difference,” said Doug Pawson, director of social enterprise and social finance at Causeway, who pioneered the fund’s idea several years ago.

Payday lenders provide loans that usually have to be repaid within two weeks. They charge $ 21 for every $ 100 borrowed, which equates to over 500% interest when annualized.

In addition, those who do not pay off their payday loans in full within 14 days are charged additional fees. “So people find themselves borrowing from one to pay off the next, and the cycle just gets out of hand very quickly,” Pawson said.

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In recent years, the use of payday loans has exploded. In a report released last month, the Financial Consumer Agency of Canada said 4.3 percent of Canadians reported using a payday loan in 2014, more than twice as many as in 2009. .

There are now 800 payday loan outlets in Ontario, providing up to $ 1.5 billion in loans to 400,000 customers. Pawson said there are 70 known payday lenders in Ottawa alone, serving tens of thousands of clients.

Doug Pawson, Director of Social Affairs and Social Finance at Causeway, was part of the team that announced the launch of the Causeway Community Finance Fund in Ottawa on Friday, November 4, 2016.
Doug Pawson, Director of Social Affairs and Social Finance at Causeway, was part of the team that announced the launch of the Causeway Community Finance Fund in Ottawa on Friday, November 4, 2016. Photo by Jean Levac /Postmedia

The Causeway fund will provide loans of up to $ 1,500 to low-income residents who now repeatedly turn to payday lenders. Those who obtain loans will be charged at prime rate (currently 2.7 percent) plus two to six percent interest, and will have up to three years to repay.

“The approach we take is this: if someone tends to borrow $ 500 every two weeks, we’re going to give them $ 1,000,” Pawson said. “It frees them from debt and puts them ahead of the cycle. “

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Those who will receive loans will mainly be clients of Causeway or one of its partner agencies, he said. “Most of them will be in low income, most living in poverty, most with disabilities or some other barrier to employment.”

Those with an adverse credit history won’t necessarily be disqualified, Pawson said. “If we can guarantee their character and secure the loan, we hope to find a way to serve them. “

Although the average payday loan in Ontario is only $ 435, “that can put you into a debt spiral that is almost impossible to get out of,” he said.


By the numbers

800 Number of payday loan points in Ontario
70 Ottawa number
400,000 Number of payday loan clients in the province
$ 435 Average payday loan in Ontario
$ 21 Amount that payday lenders can charge in increments of $ 100 for a two-week loan
546 Percentage of the annual interest rate that the charge represents
45 Percentage of payday loan borrowers who use the money for unforeseen but necessary expenses
41 Percentage that uses them for recurring and expected expenses such as rent or utility bills
53 Percentage of borrowers in households with an annual income of less than $ 55,000
20 Percentage with household income over $ 80,000

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Causeway developed the fund in partnership with three credit unions: Alterna Savings, Your Credit Union and Frontline Credit Union.

Causeway has raised $ 100,000 to serve as loan collateral for the fund, although it has a meager $ 10,000 in operating funds.

The agency sees the fund as a pilot project, but it is optimistic that banks and credit unions will adopt a similar model.

It is certainly the hope of Yasir Naqvi. The Attorney General of Ontario and MPP for Ottawa Center was on hand for Friday’s launch and made it clear he believes the financial sector should do more to serve low-income residents.

“They have the expertise, knowledge and resources to put payday loan companies out of business,” Naqvi said, to thunderous applause.

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The Big Five “need to do more,” agreed Rob Paterson, president and CEO of Alterna. “They have to put the profits below the people.”

Paterson said Alterna and the other two credit unions quickly agreed to participate in the fund when approached by Causeway. “It was something that we were passionate about. It was obvious to us. “

Just this week, the Ontario government proposed changes to the Payday Loans Act that would reduce the maximum cost of borrowing to $ 18 per $ 100 borrowed on or after January 1, restrict high borrowing frequency and give recurring borrowers more time to repay.

The province is also planning amendments to the Municipalities Act to allow municipalities to regulate the number and location of payday lenders through licenses.

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Pawson said it’s no surprise payday lenders are banding together. “It’s in and around low income neighborhoods. It really destroys our communities and our neighborhoods.

A key part of Causeway’s plan is to work with borrowers to improve their financial literacy. When it comes to payday loans, “people often don’t understand the true cost of borrowing,” said Pawson.

A survey of payday loan borrowers earlier this year by the Financial Credit Agency of Canada found that only 43 percent of them knew that a payday loan costs more than interest on a payday loan. credit card.

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