Short-term loans

On a CP article on May 29, entitled, "Crackdown on payday loan companies hits snag", Bob Whitelaw, association chairman of the Canadian Association of Community Financial Service Providers, said, "If I loaned (someone) $100 dollars for five days, and charged them $1 . . that's 107 per cent. And that's the issue we're dealing with when you take a small short-term loan and look at it on an annual rate basis."

Now, note that if I took a non-collateralized loan at a bank, even with my shitty record, I may get somewhere in the 18%-21%, nowhere near the 107% Bob is talking about.

However, I am sort of curious as to why SHORT-TERM loans are so high in interest in the first place. An one year term deposit right now is 1.30%. 2-year, 1.70%. 3-year, 2.05%. In other words, price of money goes up the longer period the loan since the lender must deal with the risk of super-inflation in future years.

However, for payday companies, the fact that these loans are SHORT-TERM make it excusable for them high interest rates. The rationale is that since it is only a dollar on a loan of $100, it isn't really that much... and 107% is some kind of financial hocus-pocus from the convertion to annualized terms...

Unfortunately, Bob is plying a bit of smoke and mirrors. Creditworthiness is not at issue here, short-term loans are less risky than long term loans. A debtor's financial situation is more predictable over a short-term basis than a long-term, as is inflation and interest rates.