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Payday loans offer a helping hand when you need it, but the friendly face often hides punishing interest rates and service charges that can turn the needy into prey.

The stress was like a dull throbbing toothache that wouldn’t go away. Her hair fell out, she chewed off her nails and she lost her appetite. Helen Jackson was in a vice grip of stress and anxiety for three years. It started with a single payday loan.

“I was scared. I was ashamed to be in that position,” she says. “But when you find yourself in a predicament, you have to do what you have to do.” It was Christmas time and Jackson was desperate. She found herself short on funds, after being sick and losing time at work. Jackson called on the banks and the credit card companies, but they all said no.

Her credit rating had plummeted after her separation from her husband, when she had fallen behind on loan payments. But there was somebody who was willing to say yes.

A friend told her about a company based in Toronto that gave payday advances via the internet. Several clicks, an application form and a few faxes later, she was approved. The next day, $300 was sitting in her bank account. The cycle began.

“You borrow this money, and you didn’t have it in the beginning,” she says. “So how are you going to have it to catch up?”

Two weeks later it was time to pay back the $300, with interest and fees. Jackson can’t remember the exact total, but she says it would have cost at least $30 on top of the original $300. So she borrowed again to make up for the deficit.

Soon Jackson was driving to various payday loan outlets throughout the area. She went at dusk, parked behind the building and hoped that no one would see her.

“It makes you feel sneaky,” she says.

Every two weeks on payday, Jackson would wake up knowing the payday loan companies she owed would swallow most of her paycheque. By the time she sought help a few months ago, she had accumulated $2,500 in debt to five different payday loan companies, and she was falling behind. Jackson recalls how the anxiety churned inside her stomach. “Your body’s got to give,” she says. “It will eat you up.”

Her creditors were calling her at home and at work, threatening to garnish her wages if she didn’t pay them back. Every time the phone rang, she jumped.

“I know it was my own fault,” says Jackson, “ they’re making billions of dollars off the average Joe.”

According to John Eisner, president of Credit Counselling Services of Atlantic Canada, Helen Jackson is only one of a growing number of people sucked into the undertow of borrowing more than they can pay back. His organization has offices across Atlantic Canada and offers free counselling for people who are trying to bring their debts under control.

“The problem we have gotten into,” Eisner says, “is that the banks have gotten away from the small loans.” He says the payday lenders and alternative financing companies have stepped in to fill the gap.

And while Eisner says he doesn’t see an epidemic of people using payday loans, he does see more and more people who are using them, and who already have other credit problems, falling deeper and deeper in debt.

“If it was a one shot deal...that would be great,” says Eisner. “Unfortunately for the consumers we’re seeing, it’s an on-going, everyday part of the process.” The problem with the payday loans, he says, is that people who are already desperate for cash, aren’t paying attention to the interest rate. “If someone is prepared to lend you money, in all probability you’re going to borrow it. They’re not aware.”

A survey commissioned last year by the Federal Consumer Agency of Canada confirms this. The FCAC commissioned a poll of more than $5,000 people by Ipsos Reid, and it found that the majority of payday loan users underestimated the cost of borrowing. The poll also found that a large bulk of the users lived in western Canada and were between the ages of 18 and 34. Under section 347 of the Criminal Code, lenders can legally charge up to 60 percent interest per year.

But critics charge that when you add up fees and various surcharges, the actual percentage rate for the total cost of borrowing is in the hundreds and sometimes in the thousands.

In a 2004 Toronto Star series looking at payday loans, reporters Jim Rankin and Nicole MacIntyre sampled loans from 12 different outlets. When interest, surcharges and fees were calculated together, the cost of borrowing per year ranged between 390 and 891 percent in some cases.

Bob Whitelaw is the president and CEO of the newly formed Canadian Payday Loan Association, a lobby group representing about three-quarters of the payday lenders. He says members of his organization follow the Criminal Code and don’t charge more than 60 percent per year in interest. Whitelaw says the extra fees include the cost of providing the service.

But critics say the distinction between interest and fees is not merely in the eye of the beholder, and should be lumped together as the total cost of borrowing under the Criminal Code.

“You can read that section backwards, forwards, upside down,” says John Lawford, counsel with the Public Interest Advocacy Centre in Ottawa. “There’s no way you can wiggle out of that,” he says. “When I hear their arguments it just makes me cringe.”

Several class-action suits have been filed in Canada accusing the industry of misleading borrowers about the true cost of a payday loan.

But Lawford says he doesn’t know of any payday loan companies who have been prosecuted in the last decade. “Nobody is watching these guys.”

The latest numbers from the industry estimate that more than 1,000 outlets are operating across Canada.

Take for instance the ubiquitous veteran of the payday lending scene, Money Mart. Remember the advertised mantra of impatient Friday night partygoers who couldn’t get their cheque cashed at the bank on time. For only “three bucks on a hun,” Money Mart would get you cash in hand before the end of happy hour. Money Mart now has more than 300 locations across the country offering payday loans and other services such as cheque cashing. It also offers online applications and quick calculators to determine how much you can borrow.

Lawford says governments were asleep at the switch as the payday loan industry mushroomed from a few neighbourhood operators to a multi-million dollar business. “They’re embarrassed,” he says. “They can’t start prosecuting them when they’re on every corner.” Even if the interest rates and fees were brought in line with the Criminal Code, Lawford says the companies are targeting people who can least afford to borrow.

Critics have also pointed to the practice of “rollovers.” Here’s how a hypothetical rollover works. Let’s say you borrow $500 and the fees and interest add up to $125 on top of that. The due date rolls around, and you don’t have $625. Well, you can pay the interest and fees of $125, and your payday loan will be extended for another two weeks, with another $125 to pay as well, plus the principal of $500. It’s possible to pay out $250 in interest and fees on a $500 loan after only 30 days. By the way, if you considered that $250 as interest, it would amount to 650 percent annually.

Helen Jackson was “rolled over” several times. She’s also acquainted with life on the opposite side of the payday wicket. While still in the grip of heavy debt, she found herself working for a payday loan outlet in Lower Sackville.

“I hated it,” she says.

Jackson says she would be breaking confidentiality agreements and privacy laws if she discussed personal details of customers who came into the store. But from her experience as a payday loan user and from the conversations she’s had with other people in her community, she says many of the people who revolve through payday loan doors every two weeks are addicted to gambling, or pensioners and people living on social assistance. She stresses though, that it’s not just people with low incomes that borrow. Jackson knows professionals with the so-called good jobs who are getting buried just as deeply as people on low incomes.

When she was a customer, Jackson says payday lenders offered coupons and discounts for referring someone to a lender, or raised her limit if she was considered to be a good customer. These are some of the other practices highlighted by the critics of the industry.

The payday loan industry is firing back. Bob Whitelaw says the industry is not targeting vulnerable people or those with low incomes. He refers to a study on the association website that shows the average profile of a lender is someone who uses a loan irregularly to offset an emergency.

Whitelaw says about three-quarters of payday lenders in Canada have now joined the association, and have agreed to adhere to a code of best businesses practice. For instance, members are no longer allowed to rollover loans, they have to follow new federal privacy regulations, and in early September, member organizations agreed to no longer lend to people on social assistance. All member outlets have to display the code, including a phone number for enquiries and complaints.

Yet, 250 to 350 payday outlets don’t belong to the Canadian Payday Loan Association and aren’t bound by these agreements.

“There are less than ethical operations outside the membership that reflect on the industry as a whole,” says Whitelaw. “That’s where we continue to call on government.” And it appears that governments are finally responding.

Just last week, the Globe and Mail reported that federal justice minister Irwin Cotler said Ottawa is ready to announce some changes that would give provinces the power to have tighter regulations over payday lenders.

“I was very pleased,” says Whitelaw, “because it now gives us the next step. All along we’ve been saying that the payday loan association fully supports regulation of the industry.”

John Lawford of the Public Interest Advocacy Centre says the “log jam” of constitutional wrangling between the provinces and the federal government over jurisdiction has finally broken. But he still has some concerns.

Lawford wants to see the federal government set minimum guidelines for all the provinces. “ too much room to regulate them completely how they wish, it could create a safe haven for payday lenders in one province and they’ll all set up there and do business across the country.”

Currently in Nova Scotia, payday lenders are required to hold a permit under the Consumer Protection Act. They also have to follow the same rules as other lenders such as providing written statements about the cost of borrowing and the percentage of interest expressed on an annual rate. Lenore Bromley speaks for Service Nova Scotia and Municipal Relations, the department that oversees consumer protection regulations for the province.She says the department is looking at whether some lenders in the province are charging more than 60 percent, and will be waiting to see what comes from the federal justice minister.

Meanwhile, Helen Jackson is happy just to be out of the financial prison she found herself in not that long ago. She enlisted the free help of Credit Counselling Services of Atlantic Canada after someone from the organization came to the community centre where Jackson now works and put on a workshop.

The credit counsellors arranged a repayment schedule by writing letters to her creditors and brokering a repayment plan. A big chunk of her pay cheque is now siphoned off to make payments, and she lives off the rest. Jackson will be free of debt in a year and a half.

“It’s heaven,” she says. Her nails have grown back, and she sleeps at night again. She isn’t afraid to answer the phone. But Jackson says she knows many more people haven’t broken free. She recognizes the look of desperation in their faces.

Jackson says she knows people who have committed suicide because of their debts, people who also had gambling and other addictions.

Her advice for anyone thinking about getting a payday advance?

“Don’t!” says Jackson. “Try to find a friend, ask your mother. Don’t be afraid to tell someone ‘I need help.’”

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