As Canadians rack up high levels of debt that are causing concern even outside the country's borders, new research from The Financial Consumer Agency of Canada has found nearly 90 per cent of Canadians who take on costly high-interest payday loans are doing so to cover necessary expenses or avoid late charges on bills.
The use of short-term payday loans — where charges in some provinces can be equivalent to an annual percentage rate of 500 per cent — has doubled recently to include four per cent of Canadian households, according to the consumer agency.
While some are using the loans to cover unexpected expenses that crop up, the FCAC is concerned about the overall trend.
“High household indebtedness and low levels of consumer savings, particularly the absence of a household emergency fund, make a payday loan a solution for many consumers despite their very high cost,” said Jane Rooney, financial literacy leader at the consumer agency.
The survey of 1,500 payday loan users showed that many Canadians are unaware of the high cost compared to alternative sources of funds. For example, fewer than half, 43 per cent, understood that a payday loan is more expensive than a cash advance on a credit card.
The research also found that while most payday loan users are low- to moderate-income earners, seven per cent have incomes of more than $120,000.
Statistics Canada reported last month that the level of debt held by Canadians exceeded the country's gross domestic product for the first time, at 100.5 per cent of GDP in the second quarter.
Much of the debt binge is tied to years of soaring residential real estate prices. The federal government has introduced a series of measures in recent months aimed at cooling the red-hot housing market.
Canada's household debt is the highest among its international peers, according to the Bank of International Settlements in Switzerland. The “unusually” high level of credit relative to GDP exceeds the measure in countries including the United States, Italy, and the United Kingdom, according to the BIS.