- 99% of Canadians have an account with a financial institution1 such as a bank or credit union.
- Only four per cent of Canadians have taken out a payday loan2.
- In order to get a payday loan, the borrower must have a bank account.
The bottom line
Banks in Canada offer accessible and convenient products and services to meet their customers' needs, including a number of small, short term loan options at a much lower cost than a payday loan.
What is a payday loan?
A payday loan is a small, unsecured, short-term loan that is typically repaid within one or a few payday cycles. Usually when taking out a payday loan, the borrower must have a bank account and provide a post-dated cheque to the lender for the full amount of the loan plus interest and fees. The date on the cheque is often the day that the borrower will receive his or her next pay cheque. Usually, the borrower must provide proof of employment, such as a pay stub. Payday lenders typically do not do a credit check on the borrower.
Small, short-term loans available from banks
Banks offer small, short term loans and credit options to Canadians that are a fraction of the cost of a payday loan, including:
- Lines of Credit – A line of credit allows a customer to borrow only what they need from an amount made available from the bank. Interest is only charged on the amount of money borrowed, not the full amount that the bank makes available.
- Credit Card Cash Advances – Allows a credit cardholder to withdraw cash from their credit card account either at an ABM or in a bank branch.
- Overdraft Protection – For customers who have signed up and are approved for this service, banks will allow them to withdraw more money than they have in their bank account, and the excess amount is called overdraft. A small fee will be charged for this service and interest will be charged on the overdraft amount, which is borrowed from the bank.
Interest rates on these small loans and credit options at a bank range from just over prime rate to about 21 per cent.
Understanding the cost of borrowing
According to Statistics Canada’s 2014 Canadian Financial Capability Survey, only four per cent of Canadians reported that their households took out a payday loan that year. While accessing a payday loan can be convenient, it can also be very costly.
In its report, Payday Loans: Market Trends, the Financial Consumer Agency of Canada (FCAC) provides a good illustration of the total cost of a $300 loan taken out for 14 days.
Source: Financial Consumer Agency of Canada, Payday Loans: Market Trends, 2016
It is clear that the cost of a payday loan is much more expensive than other types of loans available from financial institutions.
Banking is accessible
Banks understand the importance of meeting their customers’ needs and offering accessible and convenient products and services in Canada. According to the World Bank, 99 per cent of adult Canadians have an account with a financial institution such as a bank or credit union, so access to banking services in Canada is incredibly high.
Banks in Canada work hard to ensure that banking services are accessible:
- Online and mobile banking – Canadians appreciate convenience and the use of online and mobile banking continues to grow. Banks are continuing improving their online banking websites and mobile apps to provide customers with safe, convenience and secure ways to conduct almost all of their banking transactions.
- Cheque cashing – For most customers depositing a cheque at a bank, the funds are available right away. If the account is subject to a cheque hold period, the bank must make $100 available immediately. And banks will cash federal government cheques of up to $1,500 even if the individual is not a customer of that bank.
- Ease of opening an account – Only two pieces of identification are needed to open a bank account in Canada. No initial deposit or income is needed.
- No fee and low fee accounts – Basic banking accounts are available for $4 per month or less, and at no cost to youth, students, beneficiaries of Registered Disability Savings Plan (RDSP) and seniors receiving the Guaranteed Income Supplement.
- Branches with extended hours – Branches continue to evolve and many of the 5,890 branches available across Canada have extended hours in the evenings and weekends to meet customers’ needs.
- Banks actively involved in financial literacy – Financial literacy is a key priority for banks and the CBA. Banks sponsor many community programs and bankers volunteer their time for the CBA’s Your Money Students and Your Money Seniors financial literacy programs.
Helping those in debt
Banks have a strong interest in working with their clients who are facing financial difficulty. However, they also believe that providing additional credit to someone who already has trouble managing their debt is not helping that person.
Banks want to work with their customers who may be struggling financially by providing the right tools and advice. A bank can provide money management advice or consolidate loans to help reduce interest costs and simplify payments.
Banks also provide significant financial support to not-for-profit credit counselling agencies across Canada. These agencies help over-indebted individuals repay their debts and they also provide training and education to help their clients better manage their money and credit and avoid debt problems in the future.
1 World Bank, Global Findex Database 2014: http://ow.ly/SfkaL
2 Cited in the Financial Consumer Agency of Canada’s 2016 report Payday Loans: Market Trends: http://www.fcac-acfc.gc.ca/Eng/resources/researchSurveys/Pages/payday-loans-market-trends.aspx