People needing a loan until pay day have myriad choices as a growing niche emerges in the retail sector that provides fast cash - at a price.

Growth in the pay-day loan industry has exploded in Canada as well as the United States over the past decade, according to figures from the Public Interest Advocacy Centre (PIAC), a not-for-profit agency in Canada.

Although there are no specific statistics on the growth in Canada, Dollar Financial Group, which represents more than 60 per cent of the cheque-cashing stores in Canada through its subsidiary Money Mart, reported that the face value of cheques cashed through its outlets more than quadrupled from 1995 to 1999 to just over $2.3 billion US.

PIAC estimates that in the U.S. alone, the number of pay-day lending companies increased from 300 in 1992 to approximately 8,000 by 1999.

Melanie Chambers, Business Edge
Centretown Pawnbroker owner Ken Keane says increasing numbers of working poor people are using his London store and that his business is regulated.

There are about 1,200 pay-day loan stores in Canada, and while they provide convenience for consumers, they also come at a price, industry players acknowledge.

"The pay-day loan is designed for occasional emergency use, and that was its full intention," says Bob Whitelaw, president and CEO of the Canadian Payday Loan Association (CPLA).

Pay-day loans are not intended as a "revolving point of credit," adds the former head of the Canadian Council of Better Business Bureaus.

Pay-day loans emerged in Canada in the early 1990s because of demand for short-term loans of small amounts of money. Customers take one- to 14-day loans, which they repay when they have cash, Ottawa-based Whitelaw says.

Pay-day loan clients pay a fee per $100 loaned, which keeps the interest cost below the 60-per-cent annual limit set by the Criminal Code of Canada to thwart loan-sharking.

Pawnshops also offer short-term loans, charging 20 per cent of the agreed value of the item being used for collateral for a loan that must be repaid within 30 days. If the loan is not repaid, the item is put up for sale.

Ken Keane, president of the Ontario Pawnbrokers Association (OPA) and owner of Centretown Pawnbroker in London, says most pawnshop loans are under $100.

About 750 of Canada's 1,200 pay-day loan businesses are members of CPLA, Whitelaw says. Eight of the hundreds of pawnbrokers in the province belong to the OPA.

Problems arise with pay-day loans when individual stores set their own interest rates and use methods such as wage assignment and rollovers - which extend the loan period for a fee - to collect unpaid debt, says Laurie Campbell, program manager at the Credit Counselling Service of Toronto, a non-profit charitable organization that does not lend money.

"There isn't a standard (interest rate) - that's part of the problem. Depending on what pay-day loan place you go to, it's all over the place. Some are more, some are less," Campbell says.

Whitelaw says that since it was formed in May 2004, the CPLA has been working to unify the industry and develop a standard of consumer protection.

Last November, the association enacted a best business practice code, which among other things outlines that there are to be no rollovers or wage assignments and that loans are not to be made to people receiving welfare.

Since non-members do not have to comply, the government must step in to regulate the industry, says Gordon Reykdal, president and CEO of Edmonton-based Rentcash Inc.

"We're pushing for this, it's one of our mandates," says Reykdal, who is a founding member of the CPLA.

"It not only protects the consumer but it protects us as a business."

Rentcash, which has 375 stores across Canada, operates under the banners The Cash Store, Instaloans and Insta-rent. The company's website says customers cannot borrow more than 33 per cent of their take-home income and interest will not go higher than 59 per cent annually.

While there have been no efforts so far to regulate the industry, Federal Justice Minister Irwin Cotler said in September that the government was discussing the issue and there would be an initiative to protect consumers.

In December 2004, the CPLA introduced a 1-800 number to receive complaints or comments from customers. In a recently released CPLA report for the three-month period of July to September, 53 per cent of calls were complaints regarding unfair collection practices.

Although CPLA members are not required to adhere to the association's code, Whitelaw says membership can be revoked if they do not comply.

High interest rates and wage assignments become more contentious because of the type of people who use the services, Campbell says.

"People who use these services are desperate," she says.

"There's no reason on Earth that people who have these other traditional types of credit would be using pay-day loans.

"Desperate gamblers with poor credit and (those with) no other means of credit - they think this is an easy way to get money and they aren't looking at the consequences of how much they are paying in interest and they don't understand the terms," Campbell says.

The CPLA report says the average age of a pay-day loan client is 49 and that 69 per cent are employed full time and 49 per cent have a household income of less than $35,000.

The main reason for using a pay-day loan, the report says, is emergencies and unexpected expenses at 36 per cent, followed by wanting to avoid bouncing cheques and having enough cash until the next paycheque.

Centretown's Keane says that increasing numbers of working poor people are using his services. "Our clients change with the economy - it's a really difficult change to explain. A colleague, back in the 1970s, dealt with people who were on commissioned sales who were not making enough to keep going.

"A lot of people we deal with now had better-paying jobs. Now, because of free trade, they have lost their job and are now making half as much but still paying the same bills. Sometimes just stretching the dollar month-to-month gets difficult for them," he says.

If people cannot open a traditional bank account, get a credit card or line of credit, Campbell says they should contact a credit-counselling centre to find out how to improve their credit rating so they can avoid using the services.

Keane, who receives mostly jewelry, electronics and musical instruments, says he does not consider himself to be in the same business as the pay-day loan centres.

"They want to know where you work, how much you make - the person is already in a position where their cashflow is stretched to the limit and the worst thing to do is push them over the limit," Keane says. "We try to steer clear of that."

Campbell, however, says one industry is no better than the other.

"They all operate under the same auspices. A very high interest rate for a short-term (loan) ... it's a horrendous cycle," she says.

Keane says pawnbrokers are regulated under the Pawnbrokers Act of Ontario and that every store owner must report all items to the police daily, including each item's serial number, description and who it came from to ensure it is not a stolen.

Pawnshops also require some form of government identification and take a photograph of the customer for their files. Such practices, Keane says, have helped restore customer confidence and are slowly changing the dingy Hollywood image of pawnshops.

Campbell says she is fielding increasing numbers of calls from people stuck in the cycle of owing money who cannot catch up because of the high interest rates.

"There's got to be another option. People seemed to get by before these pay-day loan places cropped up - that's the theory," she says.

"There's a market for this and they're not going away any time soon, but the market is feeding off people who can least afford it."

(Melanie Chambers can be reached at chambers@businessedge.ca)