Toronto payday loans are under new government scrutiny

Posted on June 22, 2011 by Alexander Alvi

According a report by the CBC, payday lenders in Ontario are under increased scrutiny by the government for using a loophole to escape the maximum fees set under the recent payday loan legislation.  Although the legislation sets a maximum of 21% of the principal, some payday lenders are forcing their customers to purchase a debit card and possibly open a bank account in order to get the funds that they have borrowed.  Their argument is essentially that the debit card isn’t an absolute necessity, so it doesn’t count as a mandatory fee which would be covered by the existing legislation.  New laws have been proposed to close this loophole but the details have not yet been published.

This problem appears to be isolated to storefront lenders.  Online payday loans in Ontario would have extraordinary difficulty in using these tactics, since the time delay in mailing a debit card versus mailing a cheque would be essentially the same.  Under these circumstances, the speed of delivery of an online payday loan is a good argument for using the more modern online payday loan sites instead of traditional brick and mortar.  Whether the new legislation will change that is a matter yet to be seen.

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Annual Percentage Rate (APR)

Posted on June 4, 2011 by Alexander Alvi

One thing that most provinces have in common is the requirement to post the interest rate for payday loans in a standardized form so that the consumer can compare different lenders’ products.  The most common measure is Annual Percentage Rate, or APR.  This rate is non-obvious, so I will explain in this article what it is, and how to calculate it.

Interest rates for payday loans are for the most part limited to a certain percentage of the principal.  Since the term of a loan varies, the percentage of the principal doesn’t reflect the amount of utility that the borrower gets from the loan on a per-day basis.  APR attempts to quantify this in a manner that is clear to the consumer.  It tries to do this by factoring in the duration using simple mathematics, limiting to division and multiplication, unlike a more accurate measure which uses exponents.

The formula for APR is

APR = (Interest / Principal) x (365/Term) x 100

For an example, let’s take a loan of $300 for 14 days where the lender charges 23% interest (as they would in British Columbia or Alberta).

Interest = $300 * 23% = $69

APR =  ($69 / $300) x (365 / 14) x 100 = 599.64% APR

To see how this changes as the term changes, consider the same loan but for only 7 days:

APR =  ($69 / $300) x (365 / 7) x 100 = 1199.28% APR

Now consider the original loan, but with 21% interest (as you would find in Ontario).

APR =  ($63 / $300) x (365 / 14) x 100 = 547.50% APR

The relationship is straightforward.  If the term is halved, the APR doubles.  If the interest ate is halved, the APR halves.  This is the same formula typically used for mortgage financing, and this familiarity is likely part of it’s appeal, but it really doesn’t capture the actual rate that is used by mathematicians or financial analysts who instead rely on a measure sometimes known as true interest, which is beyond the scope of this article.  Maybe next time!

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First blog post!

Posted on May 30, 2011 by Alexander Alvi

This is the first blog post of hopefully many to come.  In this column, we will discuss issues related to payday loans and personal finance.  Expect to get a ton of useful information on things like bankruptcy, debt management, budgeting, saving money, investing, debt consolidation, negotiating with creditors, and great deals.

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