Sudden increases in payday lending go hand-in-hand with extreme weather, Bank of Canada (BoC) researchers have discovered.
A newly released BoC report found that days of extreme heat or cold lead to surges in payday loan applications, noting that both high heat and frigid temperatures lead to bigger bills and increased credit card use.
“One of the reasons households resort to payday loans is to pay bills,” the report noted, adding that temperature-induced health issues or missed work days due to weather are also factors.
“In general, extreme temperatures lead to higher energy consumption demand and expose households to higher health risks,” said the report, which was first obtained by Blacklock’s Reporter.
“Such increases in energy costs and health expenditures could directly drive up demand for credit, especially for lower-income households. Extreme weather may also reduce borrowers’ incomes, contributing to increases in demand for payday loans.”
BoC researchers examined the timing of extreme temperatures compared to trends in credit card balances, student borrowing, online payday loans, and other forms of credit.
“Our findings highlight the increased financial vulnerability of low-income households to environmental shocks and the need for targeted policies,” the researchers said.
The report found the average payday borrower is a renter who is 39 years old and working full-time. Most payday users also tend to be unaware of borrowing costs.
A Government of Ontario report said surveyed borrowers are typically “unclear” about how payday costs compare with other credit products and few are aware that the effective annualized rate of interest for payday loan agreements exceeds 500 percent. Only 7 percent of borrowers surveyed were aware they were paying significantly more interest than they would on credit cards.
Prior to the pandemic, 4 percent of Canadian households were using payday loans, according to Statistics Canada figures.
“Families in higher debt-to-asset categories were more likely to miss or delay payments or to use payday loans,” the 2019 report found.
Research by the Financial Consumer Agency of Canada last year found 38 percent of Canadians were forced to borrow money to cover daily expenses like food and shelter, typically by running up credit card balances.
“In the current economic context many Canadians are facing the biggest financial challenges of their lives,” the agency said in its report. “More are borrowing money to cover their day to day expenses including by using high-cost loans.”
A federal government report on consumer vulnerability found that 38 percent of Canadians borrowed money to cover daily expenses in 2022, up 12 percent from 2020. Nearly one-third of Canadians surveyed, 31 percent, said they were “short of money at the end of the month.”
