Payday loan claim denied

Halifax court rules 59.9% interest claim denied

Have you ever taken out a payday loan? What was your experience like?

A woman recently appeared in a small claims court in Halifax over a payday loan claim. The woman is a single mom who is supporting her two children. Unable to meet the financial obligations of a family for food, clothing and lodging the woman started using payday loans. The money is borrowed to be paid back on payday. With the interest and charges added in there is not enough money on that pay date so another loan is taken.

What started out as a payday loan escalated into a consolidation loan. This loan grew into another loan and became more then the borrower could handle.

The issues brought before the court were not just the 59.9% interest rate (.1% less then the illegal limit) but the so-called voluntary loan protection premium. When the court examined the situation it was ruled that the extra insurance coverage for loss of income was not voluntary but a requirement of receiving the loan.

What started out as a $2,000 loan quickly grew to a refinanced loan for another $700 and an outstanding total of $3,722. When the borrower had to reduce her work due to child care difficulties she claimed under the loss of income protection she had purchased. The insurance claim was denied.

At this point the lender sued for $2,069. The claim was denied. The ruling was that the loan agreement breached legal requirements. The amounts borrowed were not specifically stated, it did not show the actual $700 additional sum nor did it specify the amount unpaid on the earlier loan. It also did not reveal the actual cost of borrowing and it did not show that cost of borrowing as a percentage.

The courts ruled that since the insurance premium was part of the cost of the loan (not voluntary but a mandatory requirement to achieve the loan), the "effective rate of interest is much greater than (the) 60 per cent" allowed by law "and would, to that degree at least, be unenforceable."

The lesson here is to be very clear on the cost of a payday loan. Read the contract over carefully and understand the actual interest charge you will pay for this short term financing.