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A way to break the payday loan cycle?
Vancity is offering an alternative to payday loans that could help low-income people get onto firmer financial footing.
The credit union is one of the first mainstream financial institutions in Canada and definitely the first in B.C. to offer such a product, said Linda Morris, Vancity’s senior vice-president of business development, member and community engagement.
A survey commissioned by Vancity found most people who turn to payday lenders do it because they have a sudden, unforeseen expense or they've gotten behind on bills.
"It tends to be more of that, the urgent need," Morris said.
Heather, who declined to give her last name, has always shied away from payday loans because of their high interest rates. But when her long-term disability cheque was late in arriving recently, she asked at Vancity whether some of her bill payments could be delayed.
The Vancouver resident was referred to a loans officer who explained the product. She applied for the loan of less than $1,000 in the morning and it was in her account by the same afternoon.
"I have a year to [repay it]. I could've had a shorter period of time but they gave me a year because it keeps the payments small. They work with you, they look at your situation … and then they adjust it accordingly."
Burnaby's Jamie O'Keeffe certainly plans to look into Vancity's new product.
For the past year she's found herself increasingly drawn into debt to a payday lender.
O'Keeffe, 55, is a member of social justice group ACORN's Burnaby chapter which earlier this year called on Burnaby council to control the influx of payday lenders in lower-income neighbourhoods.
She's on social assistance and after her rent in the Lougheed area is paid she has less than $100 to get through the month.
A year ago, she didn't have enough to cover her phone bill so she took out a $50 payday loan. That cost her $10 in interest on top of that when she paid it back. She's currently got a $100 loan out, and will need to pay back $123 when her month is up.
"I would be $10 to $23 short every time I paid it back." So she has to take out another loan to help cover the difference.
"I'd pay it back and then re-borrow so it's like a vicious cycle."
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Dubbed the Vancity Fair & Fast Loan, members of the credit union can borrow up to $1,500, usually have the loan processed within a day and have from two months to two years to pay it back.
The loans are charged a 19 per cent annual rate of interest, higher than conventional loans, but far less than payday lenders charge. If a $300 loan is repaid to Vancity after two weeks, that would cost $2.20.
In contrast, under B.C. legislation, payday lenders can charge up to $69 in interest on the same amount over the same period. The maximum they can charge is a 600 per cent annual rate of interest.
Meanwhile mainstream financial institutions aren't typically equipped to give out small loans and do it quickly, Morris said.
"We're looking here at Vancity not to recreate a payday lender or a payday office, but how can we offer something that's fair, that's pretty fast and helps people break the cycle of revolving credit or revolving debt?"
The new loan product requires clients be members of the credit union, which costs a one-time fee of $5. There are no other application fees.
To apply, members only need to show proof of income, two pieces of identification and for those with no credit history, a record of bill payments with two different companies.
Repaying the Vancity loan will also help the clients build a credit history, Morris noted, something that doesn't happen with payday lenders.
"Without that credit history you're pretty invisible to the financial world."
The credit union will also work with them to try to improve their financial situation over the long term.
Since the product was introduced quietly in April, already a "few hundred" such loans have been processed. It was officially launched on Monday.
Morris said just as with any loan product, not everyone who applies will receive a loan. "We try to be flexible … We know there's a need. There's a gap there, definitely, in our society."
The credit union developed the product from the perspective of "can Vancity with its approach of financial inclusion and social justice do something different that's sustainable for us that is also good for our members," she said.
Jerry Buckland, an economist with Menno Simons College of the University of Winnipeg, has done extensive research on "fringe banks" in Canada, including payday lenders.
The payday loan industry has flourished since mainstream banks began closing branches in lower income neighbourhoods and began focusing on middle and high income earners to boost profits, he said.
Buckland suggested that providing people with more credit is not necessarily the answer when many people are already deep in debt.
However, he said he's "quite impressed" at Vancity's new offering.
Vancity is the biggest credit union in Canada, but it's small in comparison to the big banks, Buckland noted.
"So hey, if Vancity can do it, why can't the big banks? I think that's very encouraging."