OTTAWA (Reuters) - More Canadian credit unions are offering lower-cost alternatives to high-interest payday lenders, a product they say is needed to meet increased demand for emergency loans and prevent borrowers from becoming trapped by debt.
Credit unions, major financial players in some Canadian provinces, are offering the product as the economy struggles with weak oil prices and high debt levels.
Executives say because credit unions are owned by members, they can provide loans more cheaply than for-profit payday lenders.
“We are trying to target the market of the payday loan providers, bring people through the door and hopefully get them onto stronger financial footing,” said Eddie Francis, president of WFCU Credit Union, which publicly launched a payday service last month.
Payday loan demand is seen by many as a byproduct of Canada’s weak economy, which shrank in the second quarter. Household debt is also near a record high.
“You just need to look out the window of any credit union branch or bank branch and what do you see across the street but a payday lender,” said Linda Morris, a senior vice-president at Vancity Credit Union.
Canadian authorities have stepped up scrutiny of the industry. Critics say the high-interest loans, meant to be a bridge between paychecks, can keep people in debt.
Vancity’s loans have a 19 percent annual interest rate, meaning it would cost C$2.20 ($1.70) to borrow C$300 for two weeks. Some payday lenders charge as much as 600 percent on an annualized basis.
About a quarter of the roughly 80 credit unions in Ontario have taken a serious look at payday lending, said Megan McIver, director of government relations at Central 1 Credit Union.
Tony Irwin, president of the Canadian Payday Loan Association, said credit unions may work for some people, but will not replace all 1,400 payday loan outlets in the country.
Irwin said credit unions will not necessarily provide as large a loan as payday lenders do. He said his members must charge such high interest rates because payday loans are expensive to provide.
Jeffrey Schwartz, executive director at Consolidated Credit Counseling Services of Canada, said payday loans are a huge problem for many of his clients, adding so-called “under-banked” people should be brought into the conventional system.
“Low interest payday loans may encourage them to stay in that situation and that’s a concern,” he said.
($1 = 1.2917 Canadian dollars)
Editing by David Gregorio