Limited credit options pushing low- to moderate-income Canadians into deeper debt, report finds

Woman paying in a store with her credit card (Towfiqu barbhuiya/Pexels)

Low- to moderate-income people in Canada are being steered away from banks, and alternative resources are leaving them in deeper financial struggles, a new report says.

The report from the Association of Community Organizations for Reform Now (ACORN) found that people with lower incomes often request loans from high-cost lenders because they are denied access to regular banking or financial services.

Donna Borden, co-chair of ACORN’s eastern chapter, said many lower income people who get denied traditional banking products, such as a lines of credit, credit cards or a bank loan, is because banks see them as a high credit risk.

“We just assume everyone can just go to a bank, open up their account, and (apply) for the same services as everyone else, but that’s not the case,” Borden, who’s been a member of the association for more than ten years, told CTVNews.ca over the phone on Friday.

For the report, ACORN surveyed 623 people between February to March of this year, and found only seven per cent of respondents went to a bank when facing a “tough financial situation,” while 31 per cent used a credit card and 29 per cent approached a family member or a friend.

Almost half of the respondents, 46 per cent, stated the main reason for not using regular banking or financial services is because they were previously rejected. Around 30 per cent said they felt judged, and a quarter doesn’t trust the banks or their products. An additional 22 per cent said they feel “banks are unfriendly and make them nervous.”

‘PREDATOR LENDERS’

Besides the lack of access to traditional banking, the report also found that there were a limited options of low-cost or fair credit options for people who fall into these financial barriers. The report showed that many low- to moderate-income Canadians opted for high-cost installment lenders.

These installment loans charge an annual percentage interest rate as high as 47 per cent, although Bill C-47, which received royal assent in late June, will lower the maximum allowable interest rate to 35 per cent.

The top reason for taking out a high-cost loan was to meet everyday living expenses like paying rent or groceries. Other reasons included car repairs, medical or pet expenses, and to improve credit scores.

The report referred to these high-cost lenders as “predatory” because, in many cases, these loans carry high fees and interest rates, and often the lenders refinance the loan without the borrower's full consent, Borden explained.

Borden said she experienced this first hand when she took out a loan in 2007 and the lenders re-financed it three times without fully disclosing this to her.

“Eventually, I caught up on what was going on… but nobody would take my complaint about these people,” she said.

This common tactic makes people stay in the debt trap for longer.

Borden’s case is not an isolated one. A third of ACORN’s survey respondents said their loans got refinanced multiple times, while 20 per cent said it happened to them at least once.

INFLATION AND PAYMENTS

According to the ACORN report, more than half of the respondents cannot cover one month’s worth of expenses, while 40 per cent experienced severe financial hardship because of the pandemic and/or inflation.

While making ends meet has been difficult, paying for the high-interest loan fees also put respondents into a financially straining situation.

In the survey, 66 per cent of people indicated that if they made their loan payments on time, they could not afford basic necessities, while 48 per cent said they could not pay a different bill.

Additionally, the consequences for not making the loan payment were also harsh. Where 80 per cent said their stress, anxiety and depression levels would rise, 72 per cent said they would get in even more debt, followed by 67 per cent would bunk their credit score and 11 per cent would have to file for bankruptcy.

The report comes at a crucial time when millions of Canadians struggle to pay the bills amid high inflation. Earlier this month, the Bank of Canada raised its rate to 4.75 per cent; the highest it’s been since April 2001.

ACORN’s final report recommends the federal, provincial and local governments start supporting low-cost lending alternatives, lower the criminal rate of installment loans to 20 per cent and enhance financial inclusion by eliminating overdraft fees and lower insufficient funds fees from $48 to $10.