5 Strategies to Evade Payday Loan Indebtedness
Many households face financial challenges, leading to the temptation of securing extra cash from payday lenders. However, it is advisable to dodge this type of debt due to its high cost and time sensitivity. This guide will help you explore 5 ways to avoid payday loan debt, offering you a lifeline out of this financial quagmire.
The Attraction of Payday Loans
The thought of securing a payday loan to tide you over until your next paycheque may seem appealing. With numerous cash stores offering small to medium-size loans and countless websites providing cash loans approved within minutes, payday loans appear to be a quick fix. However, these loans carry extremely high-interest rates, making them the priciest form of debt.
The Risk of Payday Loans
Securing a payday loan can seem straightforward. All you need is stable employment, a bank account, and a physical address—with no credit check required. However, these loans are designed to offer temporary relief, typically over a span of two weeks. For instance, if you borrow $300 for a 14-day period, you’re expected to repay the full amount plus interest once the term ends.
The ease of repayment—via a post-dated cheque or a pre-authorized debit—can make you lose track of the due date, increasing the risk of defaulting on repayment. This can lead to a debt trap or a debt cycle, where you continue borrowing to repay your initial payday loan.
Understanding the True Cost of Payday Loans
Payday loan companies often downplay the actual cost of their loans. Instead of disclosing the annual interest rate, they provide a dollar amount for the borrowed sum. For example, borrowing $300 for a 14-day period may cost you $60 in fees. This might seem insignificant, but it translates to an annual interest rate of 600 per cent. In comparison, credit cards and credit card cash advances typically range from 15 to 30 per cent.
Payday lending rules differ from province to province, with fees ranging from $15 to $25 for a $100 two-week payday loan. Here’s a comprehensive list of payday lending rules by province.
5 Ways to Avoid Payday Loan Debt
Before resorting to payday loans, consider these alternatives:
1. Engage Your Family and Friends
Before considering a payday loan, engage your family or friends in a frank discussion about your financial situation. If you’re struggling to find extra funds, you’re likely not alone. The pandemic has strained many households financially. Family and friends can be a great source of support, providing assistance in finding the right debt solution.
2. Speak to Your Creditors
If you’re struggling to make bill or credit card payments, consider discussing your situation with your creditors. Most will understand your predicament and might offer to extend your due date. Your landlord may also be accommodating if you approach them before the rent is due and keep your word. It’s crucial to address the issue to avoid it becoming a recurring problem.
3. Consider Payday Loan Alternatives
If you’re in a tight spot and need to borrow money, explore your options for credit. There are cheaper options than payday loans. Your bank might offer a line of credit, overdraft protection, or a cash advance on a credit card.
If a poor credit score is hindering you from accessing these more affordable credit types, consider discussing a short-term advance on your wages with your employer or cashing in a few vacation days. If you have the skills and time, you could consider freelancing or working a part-time job in the evenings or on weekends.
4. Consult a Debt Professional
If you’re relying on credit to make ends meet until your next paycheque, it’s time to consult a professional. A Licensed Insolvency Trustee will assess your situation and discuss with you less costly debt solutions than payday loans. Filing a consumer proposal can drastically reduce your unsecured debts, freeze interest charges, and lower your monthly payments.
5. Build an Emergency Fund
Most people would prefer to avoid payday loans. However, when your credit is poor and you’re unprepared for a major expense, a payday loan may seem like the only option. An emergency fund can help you prepare for unexpected expenses.
It takes time and patience to build a healthy emergency fund. Most financial advisors recommend setting aside 3-6 months’ worth of expenses. However, even a small emergency fund can help you cover surprise vehicle or home repairs. During a layoff, a more robust emergency fund can temporarily cover groceries, rent, and utility costs. The key is to start contributing as soon as you’re financially capable.
Payday loans are never a good idea. The likelihood of falling into a payday loan debt trap is extremely high, especially for those who regularly rely on cash stores and quick online loans. With many Canadians living paycheque to paycheque, payday loans are not the solution.
Before considering a payday loan, consult a professional. Schedule a free, no-obligation consultation with a Licensed Insolvency Trustee today.
