North America's First Study on the Cost of Providing Payday Loans Released

OTTAWA, Canada – A new study on the cost of providing payday loans released today by the Canadian Association of Community Financial Service Providers (CACFS) offers a rare insight into the cost structure of Canada’s payday loan industry.

The Cost of Providing Payday Loans in Canada, prepared by Ernst & Young LLP, is the first objective, independent survey on the cost to lenders of providing payday loans conducted in North America.

The study, based on survey responses representing approximately 45 per cent of the Canadian industry from 19 payday lending companies, found that the average cost to lenders of providing payday loans is $20.66 per $100 loaned ($15.69 on a weighted average basis). For an average loan of $279 (outstanding for two weeks), the total average cost to the lender amounts to $57.64.

Operating costs represent 75 per cent of total costs to payday lenders, while bad debt costs represent approximately 20 per cent, with the cost of loan and supplementary capital making up the remaining 5 per cent.

“More than one million Canadians use or have used the services of a payday lender,” said Bob Whitelaw, President and CEO of the CACFS. “There is a strong consumer demand for small-sum, short-term unsecured credit, and both governments and consumer groups have acknowledged that there is a need for this product. This study shows that there are significant fixed costs associated with providing small, short-term loans.”

The Ernst & Young report was prepared in response to a request last January by Federal, Provincial and Territorial Ministers responsible for Consumer Affairs for information on cost of providing payday loans. The study’s methodology was developed in consultation with the Office of Consumer Affairs, Industry Canada. The Ernst & Young study is designed to add to the ongoing public policy discussion on payday loans so legislators can make informed decisions on possible changes to regulations governing the industry. To read or download The Cost of Providing Payday Loans in Canada go to the CACFS website at www.cacfs.ca and click on Studies and Reports.

“We conducted this study to give government and other stakeholders a better understanding of the payday loan industry,” said Whitelaw. “The payday loan industry supports and encourages a fair and balanced regulatory environment that allows for a viable industry while protecting the interests of consumers.”

A payday loan is a closed-end, small-sum unsecured cash advance (typically a few hundred dollars) for a short period of time (usually less than two weeks). It is designed to be a short-term solution to meet an immediate cash need such as an unexpected expense. It is not meant to be used as a primary source of credit.

Contrary to the popular stereotype, payday loan customers are mainstream Canadian consumers. A study conducted by Public Interest Advocacy Centre in 2002 found that the average annual household income of payday loan customers is $51,400, which is in line with Canadian average. Payday loan customers have a steady income and an active chequing account and most customers own their own home.

About CACFS
The Canadian Association of Community Financial Service Providers is a national association of small-sum unsecured short-term credit (“payday loan”) providers who operate retail outlets across Canada. CACFS represents nearly 90 companies that operate approximately 900 stores nationwide providing payday loans. CACFS does not represent internet loan providers, pawnbrokers or title loan providers. (However, if a member also offers payday loans over the internet, their “internet business” must meet the Association’s Code of Best Business Practices).

CACFS recently released a Code of Best Business Practices for the payday loan industry which set standards in the areas of disclosure of information, business practices and consumer education. It also prohibits certain practices such as “rollovers”, which involves extending an outstanding loan for a fee.

Who Uses Payday Loans? – Demographic Characteristics
From Fringe Lending and “Alternative” Banking: The Consumer Experience, by The Public Interest Advocacy Centre (Sue Lott and Michael Grant), November 2002: a study commissioned and funded by Industry Canada.

Survey findings in the Report were from a Household Survey of Users conducted by Forum Research, a Toronto-based market research firm. Accurate to within less than 1 per cent either way, nineteen times out of twenty:

• Between 1.0 million and 1.4 million Canadians have used the Alternative Financial Sector (AFS) in the last three years (page 37, chart 1)

• “One of the key hypotheses going into the household survey was that the AFS was “preying on the poor”. The “poor” are usually defined in terms of characteristics like household income, education, employment and housing. On all these accounts, one must reject the hypothesis that the AFS is primarily a market of society’s most disadvantaged. We estimate about 15 per cent of the AFS market would fall under Statistics Canada’s before-tax Low-Income Cut-Off” (page 36)

• Average household income of AFS user is $51,400 (Table 1-page 38)

• 52 per cent of AFS users have up to high school education. 41 per cent have post secondary education (Table 1-page 39)

• Specific vulnerable groups are not heavily represented. For example, less than 1 per cent of the entire AFS market are single mothers. Similarly, less than 1 per cent are seniors and only about 4 per cent are youth under 21 years old (page 36)

• The employment rate for AFS users is slightly higher than the Canadian average (page 38)

• Only 9 per cent of AFS users had a self assessed “poor” credit rating (table 2-page 41)

• 53 per cent of AFS users have credit cards, compared to 75 per cent of Canadians. Lower level of credit card ownership is more likely to be through choice than a lack of availability (page 43)

• Over 75 per cent of AFS credit card holders indicated “normal” or “below normal” levels of current debt (page 43)

• 70 per cent of payday loan customers have never or rarely used the ASF for more than one pay period in a row (table 6-page 48)

• Payday loan customers were the least likely of all the loan sub-sectors to report they had difficulty in paying off their loans (page 48)

• Satisfaction rating: 90 per cent of respondents were somewhat or very satisfied with AFS compared to 82 per cent satisfaction rate with banks/trusts (page 44 and Table 5-page 47)

For a copy of the report Fringe Lending and Alternative Banking: The Consumer Experience and the follow-up study Pragmatic Solutions to Payday Lending: Regulating Fringe lending and “Alternative” Banking visit the PIAC website at www.piac.ca.

Highlights of The Cost of Providing Payday Loans in Canada

• The average cost to a lender providing payday loans is $20.66 per $100 of payday loans ($15.69 on a weighted average basis). For an average loan of $279 (outstanding for two weeks), the total average cost of the lender to provide the loan is $57.64.

• Operating costs represent 75 per cent of total costs, while bad debt costs represent approximately 20 per cent, with the cost of loan and supplementary capital making up the remaining 5 per cent.

• Operating costs vary according to the size of the lender. Operating costs are between 71 per cent (medium-size lenders) and 75 per cent (small lenders) across the average of all company sizes.

• The Ernst & Young study is based on a survey of approximately 45 per cent of the payday loan industry (19 payday loan companies representing 474 payday loan offices/stores across Canada). The survey includes small, medium and large sized companies and is made up of both members and non-members of the CACFS. In addition, the survey participants include “monoline” companies that offer payday loans as their principal product and “multiline” companies that offer payday loans as just one of several products.