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Payday loans are on the rise in Canada, due to the pandemic

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After the pandemic hit, the means of income diminished, and the only goal at hand was to prevent the adverse effects the pandemic had caused. During the severe months of the pandemic, some companies were able to shift to a more flexible regime by having their employees work from the safety of their homes. However, many people were left unemployed because their jobs were either manual labour or the companies couldn’t make the shift to the work-from-home plan, subsequently losing their source of income. Without a proper income, buried under the weight of their daily expenses, those individuals went to look for other employment options. Some found jobs, but the pay was near the bare minimum.

What are payday loans?

A payday loan is a short-term, small payment loan provided by non-traditional financial institutions. The purpose of a payday loan is to cover a borrower’s relatively brief cash flow until their next paycheck, at which point they must fully pay the loan back. Payday loans are costly and highly risky, and they typically charge a fixed dollar amount per $100 borrowed—for example, $21 per $100, which reflects an annual percentage rate (APR) of 546%.

Payday loans are regulated differently in different provinces, so the maximum dollar amount that an individual can borrow varies. The lenders may impose non-payment penalties and non-sufficient-funds charges on borrowers who are unable to repay their loans in full and on time.

The facts

Some people’s financial situations were already strained before the pandemic, and due to the pandemic, the need for assistance is only growing. Moreover, many people do not believe that their financial situation will improve in the near future.

According to a survey conducted by ACORN Canada, a membership-based community that advocates for low and moderate-income earners, states that as many as 113 out of 439 participants had to look to payday loans to help meet ends because of the financial crisis COVID-19 had brought.

At least one-fourth of the participants said they’ve needed a payday loan at least ten times since the COVID-19 outbreak. Over half of the participants said they tried to get a loan from a traditional bank or credit union but were turned down. Around 83% stated that they sought the loans to pay for their daily expenses.

Many also resorted to taking up installment loans that provide significant amounts starting from $1,500 to $15,000 with a 60% interest rate paid in installments over a long period. There has been an alarming rate of increase in the usage of installment loans after the pandemic happened. Approximately 46% of the respondents said they took out installment loans of up to $15,000 during the pandemic.

One of the reasons lower-income Canadians have turned to high-interest loans has been cited as the end of COVID-19-related government support, such as the Canada Emergency Response Benefit (CERB). CERB provided financial assistance to employed and self-employed individuals who were directly affected by COVID-19. More than half of those participants said their financial situation had worsened due to the pandemic and the ongoing need for financial assistance.

Due to a lack of options, most low and moderate-income individuals are driven to take out high-interest loans. Individuals with low credit scores or low income, or both, opted to take out payday loans or installment loans. With banks not providing suitable financing options to struggling borrowers, they have no other choice but to turn to lenders such as these, falling into a never-ending cycle of debt.

Sadly, many people are being taken advantage of by high-cost lenders. These lenders do not fully disclose the cost of borrowing, issue loans under the guise that they will improve one’s credit score, or attach an insurance policy so that the lender can collect more money.

The survey’s report also notes that while the economic consequences of the pandemic continue to rise, the government’s help seems to diminish. While the heads, executives, CEOs, and big companies saw their wealth increase, the most disadvantaged sections of the population faced unemployment or a cut in their work hours, spiralling them into more financial distress.

What needs to be done?

People are distressed because of the heavy burden of debt. That’s why specific steps have to be taken to ensure the financial safety of the population.

Reducing the criminal interest rate to 30%

The Criminal Code of Canada forbids lending institutions from charging annual interest rates of over 60%. According to ACORN, the federal government should reduce the criminal interest rate to 30%. However, section 347.1 of the Criminal Code exempts payday loans from the maximum interest limitations as long as provinces enact their regulations.

Payday lenders in Ontario, British Columbia, Alberta, New Brunswick, and Prince Edward Island can charge a maximum of $15 per $100 borrowed over two weeks. This equates to 391% APR.

As of now, Quebec is the only province in which payday loans are effectively prohibited, and all loans in the province have interest rates capped at 35%. ACORN also urges the federal government to follow Quebec’s lead and repeal the Section 347.1 payday loan exemption.

For banks

ACORN also wants the federal government to make it easier for people to access traditional banking. They suggest the government reduce the non-sufficient funds’ fee for withdrawals to $10 from $45, and the federal government should guarantee bank loans for low- and moderate-income Canadians. According to ACORN, people who don’t have access to banks could use a postal banking system, in which the postal service operates a publicly owned bank.

Provide financial education

The government should strive to provide everyone with proper personal finance education. They should help struggling individuals by showing them how to manage their finances, make a budget, and look for payday loans or installment loan alternatives.

Most low and moderate-income earners do not know how to understand their finances and use them to their benefit. The federal government should provide enough information to their citizens so that they can start making smart financial decisions. By doing this, many will be able to get out of payday loan traps and will never have to seek them out again in the future.

Inform the people about debt relief methods for payday loans

Most people are stuck in a payday loan debt cycle by paying their previous loan by getting another payday loan. Without even knowing that there may be other ways to help, they keep going in circles, trying to pay down the debt they have incurred. Therefore, the government should also try to inform its residents about the different ways to repay debt, like payday loan consolidation, payday loan debt management, payday loan debt settlement, etc., that may help them pay down their debt and finally be free of it.

Conclusion

Payday loans have become a curse, pulling financially troubled people into debt traps. Quebec has formulated strict laws banning payday loans and capping their interest rates to protect its residents. However, the government should also make an effort to provide help for not just payday loans and installment loans but also other types of debt. They should give their citizens information about how different debts work and how to repay them. For example, credit card debt is another debt people struggle with repaying. Therefore, the government should give its people information about credit card debt consolidation or credit card debt management. This way Canadians can manage their debt and understand their finances in a much better way. It will also help them become financially independent in the long run.

About the Author: Lyle Solomon has considerable litigation experience as well as substantial hands-on knowledge and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, and now serves as a principal attorney for the Oak View Law Group in California. He has contributed to publications such as Entrepreneur, All Business, US Chamber, Finance Magnates, Next Avenue, and many more.

 

Economy

Here is Trump economy: Slower growth, higher prices and a bigger national debt

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If Donald Trump is re-elected president of the United States in November, Americans can expect higher inflation, slower economic growth and a larger national debt, according to economists.

Trump’s economic agenda for a second term in office includes raising tariffs on imports, cutting taxes and deporting millions of undocumented migrants.

“Inflation will be the main impact” of a second Trump presidency, Bernard Yaros, lead US economist at Oxford Economics, told Al Jazeera.

“That’s ultimately the biggest risk. If Trump is president, tariffs are going up for sure. The question is how high do they go and how widespread are they,” Yaros said.

Trump has proposed imposing a 10 percent across-the-board tariff on all imported goods and levies of 60 percent or higher on Chinese imports.

During Trump’s first term in office from 2017 to 2021, his administration introduced tariff increases that at their peak affected about 10 percent of imports, mostly goods from China, Moody’s Analytics said in a report released in June.

Those levies nonetheless inflicted “measurable economic damage”, particularly to the agriculture, manufacturing and transportation sectors, according to the report.

“A tariff increase covering nearly all goods imports, as Trump recently proposed, goes far beyond any previous action,” Moody’s Analytics said in its report.

Businesses typically pass higher tariffs on to their customers, raising prices for consumers. They could also affect businesses’ decisions about how and where to invest.

“There are three main tenets of Trump’s campaign, and they all point in the same inflationary direction,” Matt Colyar, assistant director at Moody’s Analytics, told Al Jazeera.

“We didn’t even think of including retaliatory tariffs in our modelling because who knows how widespread and what form the tit-for-tat model could involve,” Colyar added.

‘Recession becomes a serious threat’

When the US opened its borders after the COVID-19 pandemic, the inflow of immigrants helped to ease labour shortages in a range of industries such as construction, manufacturing, leisure and hospitality.

The recovery of the labour market in turn helped to bring down inflation from its mid-2022 peak of 9.1 percent.

Trump has not only proposed the mass deportation of 15 million to 20 million undocumented migrants but also restricting the inflow of visa-holding migrant workers too.

That, along with a wave of retiring Baby Boomers – an estimated 10,000 of whom are exiting the workforce every day – would put pressure on wages as it did during the pandemic, a trend that only recently started to ease.

“We can assume he will throw enough sand into the gears of the immigration process so you have meaningfully less immigration, which is inflationary,” Yaros said.

Since labour costs and inflation are two important measures that the US Federal Reserve weighs when setting its benchmark interest rate, the central bank could announce further rate hikes, or at least wait longer to cut rates.

That would make recession a “serious threat once again”, according to Moody’s.

Adding to those inflationary concerns are Trump’s proposals to extend his 2017 tax cuts and further lower the corporate tax rate from 21 percent to 20 percent.

While Trump’s proposed tariff hikes would offset some lost revenue, they would not make up the shortfall entirely.

According to Moody’s, the US government would generate $1.7 trillion in revenue from Trump’s tariffs while his tax cuts would cost $3.4 trillion.

Yaros said government spending is also likely to rise as Republicans seek bigger defence budgets and Democrats push for greater social expenditures, further stoking inflation.

If President Joe Biden is re-elected, economists expect no philosophical change in his approach to import taxes. They think he will continue to use targeted tariff increases, much like the recently announced 100 percent tariffs on Chinese electric vehicles and solar panels, to help US companies compete with government-supported Chinese firms.

With Trump’s tax cuts set to expire in 2025, a second Biden term would see some of those cuts extended, but not all, Colyar said. Primarily, the tax cuts to higher earners like those making more than $400,000 a year would expire.

Although Biden has said he would hike corporate taxes from 21 percent to 28 percent, given the divided Congress, it is unlikely he would be able to push that through.

The contrasting economic visions of the two presidential candidates have created unwelcome uncertainty for businesses, Colyar said.

“Firms and investors are having a hard time staying on top of [their plans] given the two different ways the US elections could go,” Colyar said.

“In my entire tenure, geopolitical risk has never been such an important consideration as it is today,” he added.

 

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Economy

China Stainless Steel Mogul Fights to Avoid a Second Collapse

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Chinese metal tycoon Dai Guofang’s first steel empire was brought down by a government campaign to rein in market exuberance, tax evasion accusations and a spell behind bars. Two decades on, he’s once again fighting for survival.

A one-time scrap-metal collector, he built and rebuilt a fortune as China boomed. Now with the economy cooling, Dai faces a debt crisis that threatens the future of one of the world’s top stainless steel producers, Jiangsu Delong Nickel Industry Co., along with plants held by his wife and son. Its demise would send ripples through the country’s vast manufacturing sector and the embattled global nickel market.

 

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Why Trump’s re-election could hit Europe’s economy by at least €150 billion

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A Trump victory could trigger a 1% GDP hit to the eurozone economy, with Germany, Italy, and Finland most affected. Renewed NATO demands and potential cessation of US aid to Ukraine could further strain Europe.

The potential re-election of Donald Trump as US President poses a significant threat to the eurozone economy, with economists warning of a possible €150 billion hit, equivalent to about 1% of the region’s gross domestic product. This impact stems from anticipated negative trade repercussions and increased defence expenditures.

The recent attack in Butler, Pennsylvania, where former President Trump sustained an ear injury, has boosted his re-election odds. Prediction markets now place Trump’s chances of winning at 71%, a significant rise from earlier figures, while his opponent, Joe Biden, has experienced a sharp decline, with his chances dropping to 18% from a peak of 45% just two months ago.

Rising trade uncertainty and economic impact from tariffs

Economists James Moberly and Sven Jari Stehn from Goldman Sachs have raised alarms over the looming uncertainty in global trade policies, drawing parallels to the volatility experienced in 2018 and 2019. They argue that Trump’s aggressive trade stance could reignite these uncertainties.

“Trump has pledged to impose an across-the-board 10% tariff on all US imports including from Europe,” Goldman Sachs outlined in a recent note.

The economists predict that the surge in trade policy uncertainty, which previously reduced Euro area industrial production by 2% in 2018-19, could now result in a 1% decline in Euro area gross domestic product.

Germany to bear the brunt, followed by Italy

Germany, Europe’s industrial powerhouse, is expected to bear the brunt of this impact.

“We estimate that the negative effects of trade policy uncertainty are larger in Germany than elsewhere in the Euro area, reflecting its greater openness and reliance on industrial activity,” Goldman Sachs explained.

The report highlighted that Germany’s industrial sector is more vulnerable to trade disruptions compared to other major Eurozone economies such as France.

After Germany, Italy and Finland are projected to be the second and third most affected countries respectively, due to the relatively higher weight of manufacturing activity in their economies.

According to a Eurostat study published in February 2024, Germany (€157.7 billion), Italy (€67.3 billion), and Ireland (€51.6 billion) were the three largest European Union exporters to the United States in 2023.

Germany also maintained the largest trade surplus (€85.8 billion), followed by Italy (€42.1 billion).

Defence, security pressures and financial condition shifts

A Trump victory would also be likely to bring renewed defence and security pressures to Europe. Trump has consistently pushed for NATO members to meet their 2% GDP defence spending commitments. Currently, EU members spend about 1.75% of GDP on defence, necessitating an increase of 0.25% to meet the target.

Moreover, Trump has indicated that he might cease US military aid to Ukraine, compelling European nations to step in. The US currently allocates approximately €40bn annually (or 0.25% of EU GDP) for Ukrainian support. Consequently, meeting NATO’s 2% GDP defence spending requirement and offsetting the potential reduction in US military aid could cost the EU an additional 0.5% of GDP per year.

Additional economic shocks from Trump’s potential re-election include heightened US foreign demand due to tax cuts and the risk of tighter financial conditions driven by a stronger dollar.

However, Goldman Sachs believes that the benefits from a looser US fiscal policy would be marginal for the European economy, with by a mere 0.1% boost in economic activity.

“A Trump victory in the November election would likely come with significant financial market shifts,” Goldman Sachs wrote.

Reflecting on the aftermath of the 2016 election, long-term yields surged, equity prices soared, and the dollar appreciated significantly. Despite these movements, the Euro area Financial Conditions Index (FCI) only experienced a slight tightening, as a weaker euro counterbalanced higher interest rates and wider sovereign spreads.

In conclusion, Trump’s potential re-election could have far-reaching economic implications for Europe, exacerbating trade uncertainties and imposing new financial and defence burdens on the continent.

 

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