Thomas Gaillard's troubles with payday loans began in 2008 when the financial meltdown on Wall Street sent Canada's economy into deep recession. As tire sales slumped, the Michelin plant in Waterville where Gaillard worked cut its production, and workers took turns staying home for a day each week. Weekend and holiday shifts were also cancelled. Gaillard says he earned $400 on each 12-hour shift and the production cuts sharply reduced his paycheque.

Gaillard, who is now 52, was supporting his wife and two children, a 14-year-old son and 10-year-old daughter. They lived in a three-bedroom duplex in Dartmouth and, on the days he was working, he commuted to the tire plant in Waterville.

"My wife and I just sort of tightened our belts," he says. "However, all it takes is a bit of an expense from an unknown source like a car repair or anything to do with the kids for school or things like that and the next thing you know, you're behind the eight-ball."

In Gaillard's case, it was an empty oil tank that sent him to Money Mart, one of Canada's biggest payday lenders. Someone he knew had mentioned that the company was offering interest-free, $200 loans for first-time borrowers. Gaillard showed a pay stub to prove he was working, handed over his banking information and walked out of the Dartmouth store with the $200 he needed to put oil in his tank.

It was fast and convenient, but there was a catch. When the loan came due in two weeks, he paid it off as required, but then had to borrow another $200 so he could cover his other bills. And that's when the interest kicked in. At the time, the Nova Scotia Utilities and Review Board allowed payday loan companies to charge up to $31 for every $100 they lent. That meant that when the next $200 loan came due on payday, borrowers like Gaillard, could be on the hook for $262.

"What kind of happens is you get caught in the cycle," Gaillard says. "And if another unexpected bill pops up out of nowhere, the next thing you know, you're in there and it's $300 you're looking for."

The payday trap

Gaillard's next "unexpected bill" came when the transmission went on his Dodge Caravan and he needed $3,000 to fix it. At the height of the recession, he says, the big banks had tightened their lending rules, especially for people like him with mounting expenses and falling incomes. "At that point," he says, "I had to get into some retirement savings plus use these payday loan people just to keep the vehicle on the road to get back and forth to work."

He ended up going to a second payday lender to help him pay off the first one and, as time went by, more and more of his paycheque was getting swallowed up.

"I felt like an animal in a trap," he says. "I can't imagine what income earners lower than myself have had to do. It must be terribly hard because it was hard for us."

Even though his wife went back to work as a hairdresser, the family continued to struggle and by 2012, owed $900 to payday lenders.

"One payday I looked at my wife," Gaillard says, "and I just said to her, 'I'm not paying them.' And she got upset and said, 'Well, we have to pay them.' And I said, 'You know what, I don't feel right about it. Look what I'm paying in interest alone. That's almost criminal.'"

So, Gaillard offered to pay his loans off gradually. At first everything seemed OK when he handed over a portion of the money he owed. But it wasn't.

"I think it was two hours later," he says. "I went to fill up my car to go for an overtime shift, they had cleaned out my account."

After his next payday, he got a call from his landlord telling him his rent cheque had bounced.

"Then I realized that they went into my account again," he says. "Instead of giving me maybe a month to clean it up with them, free and clear, they were taking it and then I had to sit back and think about my landlord, my power bill, my heating bill and all that sort of stuff."

Feeling desperate one morning after working an overnight shift at Michelin, Gaillard went to see the branch manager at the TD bank where he had his chequing account. The manager advised him to get help from Credit Counselling Services of Atlantic Canada, a non-profit agency that, for a small fee, helps clients get control of their debts. His credit counsellor advised Gaillard to close his bank account and open another so the payday lenders couldn't clean it out. That's when he started getting threatening phone calls demanding money.

When he answered those calls, Gaillard says he tried to reason with the payday lenders. "Basically, all I was telling them was, 'Look, your system doesn't work. People get trapped in your system. This is the only way I could figure of getting out.'"

Even though he promised to repay the loans, the phone calls continued. Gordon Arsenault, his credit counsellor, told him to ignore them. Arsenault arranged a consolidated loan from the TD Bank that let Gaillard repay his loans with no more interest accumulating.

Although two years later the Gaillards now have their finances under control, they're still struggling. He's been off work since last August, receiving Workers' Compensation after rupturing a tendon in his foot. But, no matter how tight money gets, Gaillard vows there's no way he would ever borrow again from payday lenders.

"I'd go homeless before I ever went back to them," he says. "To tell you the truth, the government has allowed legalized loan sharking."

Payday loan sharks

As a matter of fact, payday lending is a form of legalized loan sharking. In 2007, the federal government amended the criminal code to allow payday lenders to set their rates higher than 60 percent per year. That 60 percent maximum had been intended to stop loan sharks from preying on people in desperate financial straits by lending them money at excessively high rates.

The change in the criminal code gave payday lenders just what they wanted. Now, they could legally charge more than 60 percent on an annual basis without having to worry about class-action lawsuits on behalf of customers angry about criminal rates of interest. A series of such lawsuits had cost the companies millions in legal fees and settlements.

However, there was one tiny catch. Payday lending would be exempt from loan sharking rules only in provinces that adopted regulations governing the industry. Nova Scotia obligingly cleared the way. In 2009, it became the first province to regulate the industry. Eventually every western province from Ontario to BC followed suit, creating a variety of rules and interest rates. Only in Quebec and the rest of eastern Canada—except Nova Scotia—are the payday lenders potentially vulnerable to class-action lawsuits for charging more than federal law's 60 percent interest rate.

Nova Scotia's regulations included a cap on the interest payday lenders could charge for loans under $1,500 for terms up to 62 days. The regulations also required payday lenders to post the cost of their loans on an annual basis so that customers could compare their rates with other sources of credit. And such comparisons can be eye-opening.

click to enlarge First and worst

Federal laws against loan sharking set the maximum interest rate on loans at 60% per year. The feds offered to waive the laws for payday lenders in any province that created its own regulations, and in 2009 Nova Scotia became first to adopt the requisite rules. Here are the rates in the provinces that have followed our lead.

In 2011, Nova Scotia reduced the maximum payday lenders could charge from $31 to $25 per $100, still the highest rate in any province that has passed regulations. As a result, a $300 payday loan for 14 days could cost up to $75 and carry an annual percentage rate (APR) of 651.8 percent. The same loan on a line of credit would cost about $5.81 with an APR of seven percent; bank account overdraft protection would cost $7.19 with an APR of 19 percent and a cash advance on a credit card would typically cost $7.42 with an APR of 21 percent.

Mark Furey, the provincial cabinet minister in charge of payday loan policies, agrees such loans are expensive, but says payday lenders provide a service for people who can't borrow from banks or credit unions. "We recognize that the clientele are those that are most vulnerable and that's not lost on us," he adds. "That's one of the reasons that there are regulations, very stringent regulations, that oversee this consumer service."

The Nova Scotia Utility and Review Board is planning to look at those regulations again this year, but Furey has asked it to hold off until a federal-provincial committee completes its review of payday lending practices. In Ontario, for example, one payday lender, The Cash Store, has been offering lines of credit that exceed the interest cap on payday loans. The company filed for bankruptcy protection from its creditors in May and put itself up for sale after the Ontario government barred it from making new loans in that province.

Furey says the federal-provincial committee will also be looking at other lending practices such as loans for which clients put up their cars as collateral and high-cost rent-to-own leases for appliances and furniture. The minister says he's looking forward to the committee's report followed by a review, probably this fall, by the NSUARB.

When asked why the new Liberal government is following its NDP predecessor and leaving the rules for payday lending up to an unelected regulatory body, Furey replies that governments are criticized if they seem to go too far in regulating business, but on the other hand, can also be criticized for not doing enough to protect consumers. "I think it's really a matter of finding a balance," he says.

The payday loan cycle

Oddly enough, when he was federal minister of finance, the late Jim Flaherty seemed to suggest that the balance between the payday industry and its customers was out of whack and Ottawa needed to work with the provinces to strengthen regulations. In his last budget statement in February, Flaherty said: "Payday lending and other high-cost loans are an extremely expensive way for consumers to access short-term lending. Payday lenders typically target vulnerable populations, including low-income workers and families, persons with disabilities and the elderly."

Gordon Arsenault, the credit counsellor who helped rescue Thomas Gaillard from the payday lenders, wonders about Flaherty's words pointing out that "the federal government is the one that basically washed their hands of the payday loan industry."

Arsenault adds that payday loans are a "vicious cycle" for people who need small loans. "The thing with a payday loan," he explains, "is that it's not giving a person any additional money. It's just moving it ahead a couple of weeks, so that if they need $300 or $400 for a particular reason and they get a payday loan, they're not going to have that additional $300 or $400 when they get paid."

That means, he says, payday borrowers must keep taking out more loans just to stay afloat, often borrowing from one lender to pay off another. Arsenault says about 70 percent of Credit Counselling's clients have payday loans.

"It's very, very seldom that you'll see a client with one payday loan. They usually have anywhere between three and five and sometimes even more," he says.

Melanie Delorey knows all about juggling payday loans. Delorey, 28, now works full time as a nurse's aide at the IWK children's hospital. She started going to payday lenders about four years ago when she held an $11-an-hour job at the Tim Hortons inside the IWK. She says there were payroll problems because her manager would repeatedly submit fewer hours than she had worked and the mistakes couldn't be corrected until her next pay. Sometimes she'd get only half the money she was owed, other times only a third. "I was renting," she says, "and I had phone, internet and cable plus I had power to pay for and then transportation to work."

So to top up her paycheque, Delorey started taking out payday loans. "It's actually quite convenient," she says. "You go there with your pay stub, your banking information and you get money right away."

Delorey ended up going from one payday lender to another.

"I would borrow from one to pay another one," she says. "I tried to keep with the one I had initially, but it just got to the point where I got farther and farther behind so I went to a second one and after that I went to a third."

Delorey admits that aside from the $700 she ended up owing payday lenders her "bad spending habits" wracked up total debts of about $6,000. A friend mentioned Credit Counselling Services and with their help, she has consolidated her debt and is sticking to a repayment scheme that is within her budget. She says she will never borrow from payday lenders again.

"I dislike them," she adds, "it's just not a good system for people if they need money. It's just a way to get further into debt."

Payday defender

Stan Keyes, president of the Canadian Payday Loan Association which represents some­—but not all—payday lenders, complains there are many inaccuracies reported about his industry. Keyes, a former Minister of National Revenue, has represented the CPLA since 2006.

When asked about the payday debt trap with customers struggling to repay several loans, Keyes insists that careful payday lenders wouldn't hand money over to such customers because it's too risky. He acknowledges, however, that a payday loan clerk may not know if a customer is juggling several loans, but adds a careful look at a client's banking records could reveal it.

"You're always going to find someone who is prepared to take more risk in lending someone money," he says. "But the more responsible lenders who are members of the Canadian Payday Loan Association...are far more careful." (Note: Both Thomas Gaillard and Melanie Delorey took out their first loans with Money Mart, which is a member of the CPLA.)

Keyes argues that, in some cases, payday loans are just what a cash-strapped customer needs. "Put yourself in the borrower's shoes for just a minute," he says. "These loans are expensive, but less expensive than a series of bank overdrafts, or defaulting on an auto loan or defaulting on your mortgage, and they're a better deal than having the electricity, or your heat or the telephone turned off only later to pay for having them turned on again. So, in many instances, the payday loan is the smarter choice."

Banks should step up

Jerry Buckland doesn't agree that payday lending is a good system for people who need small loans. Buckland is a professor at Menno Simons College in Winnipeg and the author of the book Hard Choices: Financial Exclusion, Fringe Banks, and Poverty in Urban Canada.

Buckland argues that Canada's chartered banks should be doing more to provide basic banking services including lower-cost, small loans. He points out that the big Canadian banks are highly profitable. In fact, last year the five biggest ones made record profits earning $29.2 billion, up from $27.8 billion in 2012.

"Someone has described the Canadian banking system as a protected oligopoly meaning that there's a small number of very large banks," Buckland says, "and the government essentially has regulations that protect them from foreign competition."

He also points out that Canadian banks have been closing branches that serve lower-income people in inner cities. So, he says, in return for protection from foreign competition, the federal government should require the banks to provide better service including the kind of small loans that payday lenders now provide.

It seems unlikely, however, that a government led by Stephen Harper and his ultra-conservative colleagues will compel the big chartered banks to provide small loans at reasonable rates. The provinces, which regulate credit unions, could require them to offer small, low-interest loans and indeed, Nova Scotia's minister, Mark Furey says it's something he's prepared to look at.

"My mind's not closed, I don't wear blinkers," he says. "It's certainly an option and an opportunity we could explore as government."

In the meantime, the forthcoming regulatory review is being left firmly in the hands of the business-friendly Nova Scotia Utility and Review Board.

Thomas Gaillard—still bitter about his experiences with payday lenders—has some advice for the board.

"Shut them down, outlaw them," he says. "Shut them down."