Interest rate is the percent charged, or paid, for the use of money. It is charged when the money is being borrowed, and paid when it is being loaned. Interest is paid by a bank when money is deposited because the bank uses that money to make loans. The bank then charges the borrower a little more for that same money so it can make a profit for its service.

When interest rates are high, fewer people and businesses can afford to borrow, so this usually slows the economy down. However, more people will save (if they can) because they receive more on their savings rate.

When the central banks set interest rates, such as the U.S. Fed Funds rate, it is the amount they charge other banks to borrow money. This is a critical interest rate, in that it affects the entire supply of money, and hence the health of the economy and the demand for payday loans.

Payday Loans UK

Overview:

Payday loans are an American phenomenon that have been growing fast in the UK market over the last five years. The premise is that they offer a relatively small amount of cash (usually up to £500) for a short term, around 2 weeks (or until ‘payday’). The providers charge a fee for the loan usually expressed as a flat fee per £100 borrowed – usually around £25.^[3]

The number of people taking out payday loans in the UK in recent years has increased four-fold, to 1.2 million in 2009.^[4][5][6] Borrowers took out around 4.1 million loans amounting to £1.2 billion in money lent.^[1] Payday loan borrowers are taking out an average of 3.5 loans a year and the average size of a payday loan in 2009 was an estimated £294.^[4] 67% borrowers had incomes below £25,000.^[1]

A typical payday loan could cost £20 for every £100 borrowed, meaning a £300 loan would cost £360 if it was repaid after one month. Since there are no legal limits on rolling over loans in the UK,^[1] if the loan was rolled over for six months it could cost as much as £660 to repay the loan in full. There are no restrictions on the interest rates payday loan companies can charge: one UK company offers a “typical APR” of 1355%,^[5] although this takes compounding into account; without compounding the APR would be 300%. Another lender advertises an annual rate of 2,225%.^[7] Most companies charge 25% for an advance repayable at the end of the month, which explains the high rate; a few charge 30%, which is equivalent to an APR of over 2,000%.

Regulation:

Under the Consumer Credit Act 1974 lenders must have a licence from the Office of Fair Trading (OFT) to offer consumer credit. The Consumer Credit Act 2006 explicitly requires the OFT to consider irresponsible lending in its evaluation of whether a lender is fit to hold a licence.^[8] There are no restrictions on the interest rates payday loan companies can charge, or on rolling over loans. Advertising of payday lending is subject to the Consumer Credit (Advertisements) Regulations 2004.^[9] This means that the “typical APR” must be stated in adverts which meet certain criteria, such as adverts which indicate that credit will be given to customers who may otherwise find access to credit restricted.^[10] Advertising is regulated by the Advertising Standards Authority (ASA), and there have been several cases of the ASA upholding complaints against advertising by payday lenders.^[8]

In June 2010 the Office of Fair Trading published a ‘Review of high-cost credit’.^[11] In this report they concluded that changes could be made to the industry itself, but that “more radical approaches would be required if the Government or others wanted to tackle the wider social, economic and financial context in which high-cost credit markets exist.”^[11]

To get a good idea of the size and range of payday loan companies operating in the UK, comparison sites are a useful tool, as recommended in the OFT report – “We recommend that the Government works with industry groups to provide information on high-cost credit loans to consumers through price comparison websites. If this cannot be undertaken on a voluntary basis, the Government should consider the case for introducing legislation to create a single website allowing consumers to compare the features of home credit, payday and pawnbroking loans alongside credit unions and other lenders in their local area.”^{[11] Exerpts from Wikipedia UK Payday Loans}

Consumer Credit Act:

The Consumer Credit Act 1974 requires most businesses that lend money to consumers or offer goods or services on credit or engage in certain ancillary credit activities to be licensed by the OFT. Trading without a licence in such cases is a criminal offence and can result in a fine and/or imprisonment.

For information on consumer credit licensing, including application forms and relevant guidance, go to the Licensing area of the site.

The Act also regulates the way in which consumer credit licensees carry on business. For example, there are rules on advertising, pre-contract disclosure, credit agreements and post-contractual information. In addition, the Act confers certain rights on consumers, including in relation to withdrawal from a credit agreement, early settlement, and section 75 (joint and several liability).

A brief summary of the key provisions, together with reference to relevant legislation and guidance, is set out in the pages below.

• Pre-contract information 
• Credit and hire agreements
• Post-contract information
• Early settlement
• Exempt agreements
• Brokerage fees
• Equal liability
• Credit advertising
• Unenforceable credit agreements (information requests under section 77/78/79)
• Information sheets 
• Unfair relationships 

For general enquiries and guidance on the work of OFT, please phone us on 08457 22 44 99 or email enquiries@oft.gsi.gov.uk.

Please note the OFT is unable to provide tailored advice to individuals. To find out your rights under the Act or other legislation you should obtain independent advice.

A summary of the changes to the Act arising from implementation of the Consumer Credit Directive can be found in the BIS guidance on the implementing regulations (pdf).

 Payday Loans Canada

Canadian Payday Loan Industry:

It is believed that the payday loan industry first emerged in Canada in the early to mid-1990s in response to a demand for small-sum, short-term credit.  As of 2004, there were an estimated 1,200 payday loan stores in Canada, although the industry is growing rapidly and there is no easy or official means of tallying the participants.(5)  Moreover, no authoritative information is available on industry revenues or profits, with different sources citing figures ranging from $170 million to $1 billion in annual revenues.

Payday lenders typically follow one of three business models:  the traditional model, the broker model or the insurance model.  Those using the traditional model incur all of the operating costs, provide loans from their own capital (in most instances, equity capital), and collect all interest and other charges.  Under the broker model, payday lenders incur all of the operating costs, but the loan capital is provided by a third-party financial institution.  In this case, the company collects a “brokering fee,” while the third-party lender collects the interest and assumes the risk of loan defaults.  With the insurance model, companies again incur all of the operating costs and charge customers a fixed fee and insurance-type premium on each loan transaction.  The premium, which is designed to cover the cost of providing the loan funds as well as the risk of loan default, is assumed by an insurance company that is often owned by the payday lender.  One study suggests that companies may use the broker and insurance models to minimize their risk of being charged with exceeding the criminal interest rate under the Criminal Code.(6)

In addition to loans, payday loan companies may offer other services, including cheque cashing, advances on tax refunds, money transfers, foreign currency exchange, bill payment and/or money orders.  Some companies offer debit cards that carry a balance of the amount of the loan and that can be used at any automated teller machine (ATM) in Canada.  Most revenues, however, are typically generated from payday loan and cheque-cashing services.(7)

Key Industry Players:

National Money Mart Company, a Victoria-based subsidiary of the U.S.-based Dollar Financial Group (DFG), is the Canadian industry leader with its Money Mart payday loan stores.  National Money Mart Company estimates its market share to be 30% by number of stores and close to 50% by volume of business.  As of November 2005, there were 344 Money Mart stores in Canada, 130 of which were operated by franchisees.  In the 2004-2005 fiscal year, revenues from DFG’s Canadian operations were US$108.2 million or 37.1% of the company’s total revenues.  Between 2003-2004 and 2004-2005, the revenues from DFG’s Canadian operations increased by US$23.4 million.  The company attributes this growth to:  a stronger Canadian currency; pricing adjustments made to the short-term consumer loan product in late 2003-2004; and higher loan amounts offered as a result of changes to the lending criteria in 2004-2005.(8)

Rentcash Inc., an Edmonton-based company that is publicly traded on the Toronto Stock Exchange (TSX:  RCS), is National Money Mart Company’s largest competitor in Canada.  As of November 2005, Rentcash operated 298 payday loan stores across Canada, with the exceptions of Quebec and Nunavut:  197 under the Cash Stores banner and 101 under the Instaloan banner.  Rentcash also operates 86 Insta-rent stores, which are located primarily in The Brick and United Furniture Warehouse stores and serve as renters of furniture, appliances, electronics and computers. 

In the 2004-2005 fiscal year, Rentcash reported revenues of C$77.3 million, an increase of C$55.1 million, or close to 250%, from the previous year.  Moreover, in 2004-2005 the company posted its first profitable year, with net income of C$7.3 million, compared to a net loss of C$219,264 in 2003-2004.(9)  In 2005, Rentcash was ranked as the top Investor 500 small-cap performer by Canadian Business Magazine, second in the Top Performers over $20 million by Alberta Venture Magazine, and seventh in the PROFIT HOT 50 ranking of emerging Canadian growth companies.  The company attributes its increased earnings to:  continued store expansion; growth in store sales; and the acquisition of established stores.  As well, there has been strong growth in the company’s brokerage division, which has offset losses in the rental-purchase division and increased corporate expenses.

Cash Money is a third key industry player that, unlike DFG and Rentcash, does not publish an annual report.  According to the company’s Web site, Cash Money Cheque Cashing Inc. is a Canadian-owned and -operated company that opened its first store in Toronto in 1992, and today operates over 70 payday loan stores in British Columbia, Alberta, Manitoba, Ontario, New Brunswick and Nova Scotia.

While most payday loan stores in Canada are operated by one of the three key industry players described above, there are also many smaller companies with single or multiple stores that offer payday loans to Canadians.

Current Regulation of the Payday Loan Industry:

Shared federal-provincial jurisdiction over payday lenders has meant that they are essentially unregulated.(18)  For example, the Criminal Code provision on usury (section 347) has not been used in a criminal context to curtail the activities of payday lenders, although several civil suits against payday lenders are currently under way.(19)  The consent of a provincial Attorney General is required to prosecute an offence under section 347.(20)  Provincial governments have yet to prosecute a payday lender; they may fear that the lack of a payday loan company alternative would result in consumers using illegal alternatives such as loan sharks.  Beyond provisions in the Criminal Code, some provinces/territories have enacted statutes designed to regulate aspects of payday lending but, with the exception of Saskatchewan, they do not have comprehensive legislation.(21)