Young, low-income families are twice as likely to use payday loans as the rest of the population, even though they are less likely to be able to afford the loans' high fees and interest rates, finds a new Statistics Canada study.
Only about three per cent of Canadian families (about 353,300) reported in 2005 having taken out a payday loan within the previous three years.
But families with little savings or no credit cards, particularly those who had been refused credit, were significantly more likely to have used the loans.
"Without these options and faced with financial shortfall, these families may have turned to payday loans in an effort to bridge the gap between pay cheques," Statistics Canada says in its report, published in the April issue of Perspectives on Labour and Income.
"These families appear to have few other options to get out of their financial straits."
Young families with a main income earner under 35 years old were three times more likely to have used payday loans than those with income earners aged 35 to 44.
Four in 10 families who borrowed money through payday loans had spending that exceeded income, substantially more than families who had not used payday loans.
The study found that families that were behind in bill or loan payments were more than four times as likely to have used payday loans, even after controlling for other key characteristics such as income and savings.
More than one-quarter reported that they could not handle an unforeseen expenditure of $500, almost four times the rate for non-users. Nearly half could not handle one of $5,000 (17 per cent for non-users).
Payday loans are typically offered by lenders other than banks or other regulated financial institutions.
The loans are usually used for relatively small amounts, generally $100 to $1,000, and usually for a short term, with repayment on or before the next payday.
The report points out concerns have been raised about questionable practices within the payday loan industry, including the high borrowing costs, insufficient disclosure of contract terms, and unfair collection practices.
