Research conducted by the Bank of Canada (BoC) shows that spikes in payday lending occur in conjunction with extreme weather. The report found that on days of extreme heat or cold, there is a surge in payday loan applications. This correlation is attributed to the increased financial strain caused by higher bills and greater reliance on credit cards. Weather-related health issues and missed work days also contribute to the increased demand for payday loans.
The report highlighted the heightened financial vulnerability of low-income households to environmental shocks. It emphasized the need for targeted policies to address the impacts of extreme weather on credit demand. According to the findings, households affected by extreme temperatures are faced with higher energy consumption demand and increased health expenditures. These factors directly drive up the demand for credit, especially among lower-income households.
The study conducted by BoC researchers also examined the timing of extreme temperatures in relation to trends in credit card balances, student borrowing, online payday loans, and other forms of credit. This comprehensive analysis revealed the significant impact of extreme weather on credit demand.
A Government of Ontario report added that borrowers are often “unclear” about the costs associated with payday loans, including the effective annualized interest rate, which can exceed 500 percent. Prior to the pandemic, Statistics Canada figures indicated that 4 percent of Canadian households were using payday loans. Families in higher debt-to-asset categories were found to be more likely to use payday loans.
Research by the Financial Consumer Agency of Canada found that a large percentage of Canadians were forced to borrow money to cover daily expenses, typically through high-cost loans like credit cards. Additionally, a federal government report on consumer vulnerability showed a significant increase in the number of Canadians borrowing money to cover daily expenses, highlighting the financial challenges faced by many in the current economic context.