Living paycheque to paycheque? How Canadians get by

Did you know that 47% of Canadians live paycheque to paycheque? Basically half of us are one payday away from some pretty dire straits. Missed car payments, an empty fridge, or a credit card bill that could bring some of us to our knees. Those are the facts for an estimated seventeen million, six hundred and seventy-three thousand Canadians. Until I began researching for this piece, I hadn’t grasped the size, depth and, frankly, the nightmare of this problem. Sure, I’d heard stats on the news like, “the average Canadian spends roughly $1.77 for every dollar earned,” but had never really considered that for many, many people, needing to borrow money is just a reality. And a pretty frequent one too.

During the COVID-19 pandemic, Vice reported that payday lenders are charging up to 780% interest. Yes, you read that right, and yes, that should be criminal. Although it seems obvious that people should avoid payday lenders altogether, the unfortunate reality is that it’s not that easy to get access to other options, like overdraft. I spoke to Parween Mander, the Financial Coach at KOHO, who explained that “not everyone can access overdraft protection or a line of credit due to income or poor credit score ratings, which is why payday loan companies are still able to operate.” Cue the 780% interest (and my blood pressure rising). “They’re the last resort and only option for many people.”

I spoke to a source at one of Canada’s big five banks to better understand, pardon my French, what the hell is going on, and decided to draw on my overdraft to fully understand the (often sneaky) fees firsthand. I was also game to take out a payday loan to see just how painful those fees would be, but so many experts told me it would be credit-score suicide that I decided not to risk it unless I ever really had to.

Inequality and small loans: A tale of entanglement

As you’ve gathered by now, if you didn’t already know, is that Canadian personal and household debt is out of control. Debt, she adds up. Then she adds up some more. I decided to poll some of my close friends, many of whom are part of the 47% and living from one paycheque barely to the next. From what they’ve shared, the few days leading up to the next payday are often the hardest; rent is due, bills are due, their cars need gas, and the fridge at home is in a sad, sorry state. So what do you do when you have expenses to cover but payday isn’t for a few days? Many folks seek a small loan to get by.

Access to small loans is rife with inequalities, particularly when it comes to income and credit score. If you’re middle to high income with good credit, then decent lending products —such as personal lines of credit and overdraft protection— are available to you. If you’re low income or have bad credit, well, then you’re stuck with “options” like predatory payday loans.

"Access to small loans is rife with inequalities, particularly when it comes to income and credit score."

Overdraft protection: Are you friends with your bank?

The big banks love to advertise overdraft protection with catchlines such as, “avoid the expense of a $45 non-sufficient funds (NSF) fee,” and “enjoy the security of knowing you won’t be declined at store checkout.” They provide specific, numeric attention to the amount you can borrow and the fee you pay, but curiously, only a couple mention the annual interest rate attached to the loan in their marketing.

So I decided to go $100 into overdraft for 2 weeks to see what the experience was like. Given my overdraft protection is a pay-per-use model, I was immediately charged a $5 fee. (Fact: you can only be charged the pay-per-use fee once you’re in overdraft, so the fee itself is a loan on top of your loan). Overdraft protection, as it turns out, is a pretty good option for people who rarely need to dip into the red. Although it has its risks; if I chose to spend my way into $100 of overdraft, I would have been charged $5 for every transaction, hence the name, pay-per-use. Illustrated more clearly, if I did 5 transactions of $20, I would have been $100 in overdraft, with $25 in pay per use fees, a total deficit of $125 plus interest.

Alternatively, there is an option to pay a $4 flat fee every month to avoid stacking up pay per use fees, however, the assumption then is that you will consistently go into overdraft. In other words, the big banks want you to go into debt every month because they profit off the interest consistently owed on the balance. (19-22% annual interest, might I add).

I spoke with an employee at one of the big banks about all this. To protect their identity, I’ll refer to them as Amira. As it turns out, if you’re using overdraft protection a lot, Amira told me banks will suggest you switch from pay-per-use to “the flat fee of $4/month. And as a goodwill gesture, depending on the client, we credit back the $5 pay-per-use fees but it really is dependent on who the client is speaking with.” My understanding then, is that this goodwill gesture from your bank is dependent on your relationship with the employee, or even their mood that day. Sounds like a breeding ground for unconscious bias, right? When I pressed Amira on this, they were quick to add, “there will always be certain biases but we have mandatory e-learning which helps our staff get over their own judgements and foster inclusivity.” E-learning is all well and good, but dismantling unconscious bias is rarely achieved in a 3-hour video.

When I attempted to get clarity on the income brackets who most often use overdraft protection, I was surprised to find that Amira couldn’t call out a pattern. “I have wealthy clients who lack control of their expenses and use overdraft all the time, and I have clients who aren’t wealthy and never have and never will use overdraft. It’s really a matter of how you handle your own money.”

The truth is there is a massive difference between not wealthy and low-income. In order to receive overdraft you must be approved for it. Given most banks don’t report overdraft to Equifax, a client’s credit score is one of the key determining factors for receiving overdraft protection.

So, if you have a bad credit score, you’re likely not going to be offered overdraft protection. Worse yet, you’re likely unable to receive a credit card, therefore, leaving you with the worst of lending options… predatory payday loans.

"The truth is there is a massive difference between not wealthy and low-income.”

Credit score needed for overdraft protection

Your credit score, that three-digit number that reflects your creditworthiness, is a key factor that banks consider when deciding whether to approve your request for overdraft protection.

While each bank may have different credit requirements, a good credit score will undoubtedly increase your chances of getting overdraft protection. Generally speaking, a credit score in the range of 650 to 900 is considered good to excellent in Canada. Having a score in this range could demonstrate to banks that you are a responsible borrower who is likely not to abuse the overdraft facility. Regardless of your credit score, for $5 a month, KOHO offers overdraft protection for up to $50-250 in case you’re tight on funds. You’ll also get access to a financial coach, who can give you advice on all things money.

If your credit score is on the lower end of the scale, say below 600, getting approved for overdraft protection might be a challenge. Low credit scores are generally viewed as a direct indication of high-risk borrowers. This can make financial institutions hesitant to extend additional credit services such as overdraft protection due to fears of late payment or default.

It's crucial to remember, though, that a credit score is not the sole determinant. Banks also consider other factors such as your overall financial situation, your income stability and the relationship you have with your bank. Despite having a low credit score, if you've built a strong, long-term relationship with your bank and have a steady income, you might still be granted overdraft protection.

Predatory payday loans: Enter at your own risk

There’s a good reason why ‘payday loans’ are synonymous with ‘predatory lending’ because quite frankly, they are just that: egregiously expensive loans that catch Canadians, mainly marginalized and low income, into vicious cycles of debt. We previously spoke to a few young Torontonians who’ve been caught in the payday loan cycle, and wish they never had.

Ultimately, I didn’t find myself in a Money Mart to borrow $100 for the sake of this piece because the risks just weren’t worth it. I’m lucky. But for many, it’s unavoidable. In the world of finance there’s unanimous confirmation that payday loans should be avoided at all costs. From fintechs (like KOHO), big banks (like RBC), and even this report by the Financial Consumer Agency of the Government of Canada (FCAC), we all say “enter at your own risk.” So then why are payday loan centres considered an essential business during a global pandemic?

So where do we go from here?

As I mentioned, I went $100 into overdraft for 2 weeks. In totality, I owed $105.72 ($100 loan, $5 fee and $0.72 in interest). Overall the experience was seamless, but I am fully cognizant that I am privileged to have overdraft protection in the first place. If you’re in a bind for a small amount (say, a few hundred dollars) and you can pay it back fast, overdraft is a simple way to cover the difference. But proceed with caution. Over the course of a year, the fees definitely add up, as does the interest.

Payday loans, on the other hand, should be avoided at all costs if possible. They are advertised as the fastest and easiest way to get your hands on cash in a pinch, but the costs greatly outweigh the benefits. In the FCAC report I mentioned earlier, they highlight the following costs accrued on a $200 14-day loan:

• Line of Credit - $5.81

• Overdraft Protection on a Bank Account - $7.19

• Cash Advance on a Credit Card - $7.42

• Payday Loan - $63

Even more concerning is that nearly 60% of respondents in the report were unable to identify that payday loans cost more than an outstanding balance or cash advance on a credit card. In other words, people using payday loans didn’t know how much they were costing them. In the same report, the FCAC  even provides the following warning: “Before you make a decision, explore your options.” Why isn’t there a better alternative?

Whether this is an issue of manipulative advertising, or financial literacy, is not immediately clear (though, it’s worth noting, financially literate respondents were found to have used fewer payday loans). What is clear, however, is that payday loans are predatory by nature, and simply hurtful to those who are already down on their luck (and bucks).

"When nearly half of us are one paycheque away from insolvency, it would be naive to believe this is a personal spending issue."

Amira closed our conversation by reiterating that  “Clients are better off taking a cash advance from Visa or Mastercard at 21% interest versus taking out a payday loan. The rate and fees they tack on are ridiculous, all the while pretending to be accessible.”

But the issue still stands: if you are low income or have bad credit, you’re likely unable to use the first three lending products highlighted above. Meaning, we uphold a system that chastises payday lending, all the while making them an essential service because, unfortunately, many Canadians need to rely on them.

I circled back with Financial Coach Parween, who believes that “we need more accessible tools and resources that don’t trap vulnerable individuals in a cycle of consumer debt.” An option she highlighted in our conversation was lending from a credit union instead of a payday loan centre, because they are community-driven. And as a result, credit unions have specific programs in place to support individuals, and lower barriers of entry in terms of accessing credit.

Ultimately, a true solution has yet to emerge that meets Canadians where they are: likely in need of a buffer before their next payday. A solution that meets Canadians’ needs without leaving them in a crippling cycle of debt.

When nearly half of us are one paycheque away from insolvency, it would be naive to believe this is a personal spending issue. The entire financial industry and regulating bodies need to reflect on how they uphold privilege, and if their standard practices are harming more than they’re helping the Canadians they’re meant to serve. In other words, when times get tough, does your bank actually have your back? Probably not. Now say it with us: The time for disruption was yesterday!

Have a story to share on your experience with overdraft protection or payday lending? We’d love to hear it. Tag or DM us on social @getKOHO.