Payday lending has been described as “cruel” and “predatory,” so it’s no surprise the Ontario government is looking at tightening regulations around the industry and other “alternative financial services.”

But gaps in the ability for low-income people to get loans they need mean the province is unlikely to follow the lead of neighbouring Quebec in effectively prohibiting payday lending.

Payday lending typically involves short-term loans – usually a couple of weeks – at high interest. Quebec has thrown a wrench into this business model by refusing to grant permission to interest rates higher than 30 per cent – rates too low for payday lenders to operate profitably in the province. Mostly, anyway.

“Payday lenders are present in Quebec, but it’s an underground thing. We know they exist, but it’s not widespread,” says Dominique Gervais, lawyer with Option consommateurs, a non-profit consumer rights group. “They try to pass under the radar of the consumer’s bureau here.”

Quebec’s system relies on more than just the prohibition on payday lending. Quebec budget counselling services also provide an alternative to payday lenders: working with the financial cooperative Desjardins, counsellors can provide interest-free loans to people in distress, with up to $1500 potentially available.

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According to Desjardins, the repayment rate on the interest-free loans is roughly 85 per cent.

Nevertheless, those measures haven’t stopped other forms of “fringe credit” from operating like pawn shops and rent-to-own businesses. That’s because the need for small but urgent amounts of credit hasn’t disappeared for Quebec’s low-income community.

“If your fridge is broken now, you need to replace it whether you’ve got $500 or not,” says Gervais.

That’s why Ontario is unlikely to see payday loan companies disappear completely. Defenders say payday lending responds to a genuine consumer need in ways that conventional banks won’t.

Jerry Buckland is the author of Hard Choices: Financial Exclusion, Fringe Banks, and Poverty in Urban Canada and professor at Menno Simons College in Manitoba. He says payday lenders are part of a system of financial exclusion that low-income communities deal with.

“Banks have cut down their branches as part of their business plans. Inner-city, low-income branches aren’t as profitable, so people who live in those neighbourhoods find there’s no banks around,” he says.

Antonia Fikkert, a professor at Dawson College, says studies have found that traditional banks treat people with low and medium incomes differently, in ways that explain some of the customer growth for payday lenders.

“I think they’re part of the problem, the way mainstream banks are acting,” she says.

That reality is unlikely to change significantly after Ontario’s payday lending regulatory review – it’s largely technical with no major revolutions expected.

“Our government wants to ensure Ontario consumers receive the protections they need. Ontarians should have access to credit and other financial services, without being subjected to harmful practices,” said Andrew Donnachie, a spokesperson for Minister of Consumer and Government Services David Orazietti.

Stan Keyes, President of the Canadian Payday Loan Association, is skeptical of Quebec’s prohibition in particular and of “over-regulation” in general.

“First and foremost, it should be understood that over-regulation is going to have some serious unintended consequences,” says Keyes.

Keyes says the industry deals with higher costs to lend money than traditional banks, thanks in part to high default rates that come from lending to people without credit checks. Some regulatory changes – such as lowering the maximum allowable charges on a loan – could drive out legal lending.

“Unlicensed lenders charge whatever they want, they’re located in Belize or the Cayman Islands, and they’re high-risk,” says Keyes. He points to a study conducted by the Consumer’s Council of Canada (and funded by the federal government) which found that in the absence of a regulated payday lending sector, people are forced to rely on “the least compliant and least consumer-friendly lenders.”

Fikkert adds that it’s important not to simply assume all payday loan customers are victims.

“I don’t think enough credit is given to the people using payday lenders. They actually know a lot about their own financial well-being.”

Buckland, at least, doesn’t dismiss Quebec’s experience.

“There’s this whole other province of seven million people, and is it falling apart? I don’t think so.”

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