Payday Loans: The Most Expensive Way To Borrow
Payday loans are not set up for you to succeed. Payday lenders are businesses, and they thrive on huge interest rates and exorbitant fees. Maybe that isn’t what you want to hear, but if you’re borrowing on a payday loan, it may be time to step back and look at your finances to see what else you can do to make ends meet.
What are payday loans?
For those of you who have never needed a payday loan, or aren’t sure what they even are, they are a relative newcomer to Canada. Payday loans, or cash advances, are short-term loans with the intent to give you quick cash between two pay periods. With no required credit check, it’s fairly easy to obtain a payday loan, and you will have cash in hand within an hour of applying for the payday loan.
All that is required is proof that you have a regular income, a permanent address, and a bank account in good standing that you will authorize a withdrawal from. If you have no credit or poor credit, this does not affect your ability to obtain a payday loan, so this can be deceivingly appealing. However, there are multiple problems with payday loans, stemming from the incredibly high fees and interest associated with them. While receiving money when you need it can be a blessing, it costs far more to pay back these payday loans than any typical loan or line of credit.
Problems with Payday loans
What kind of problems arise when taking payday loans? If you are able to pay back your cash advance at the specified time, the biggest risk with a payday loan is the sheer amount of interest associated with it. <example>
If you are unable to pay back the payday loan as intended, you are caught in a pretty awful cycle. Fees and penalties are compounded with each loan you’re not able to repay in time (typically less than two weeks, depending on your payday schedule) and the interest continues to compound.
Fees associated with payday loans in Canada
Up until 2008, Canada’s payday loans got around usury laws by having substantial fees including a set-up fee, broker fee, administration fee, processing fee, convenience fees, verification fees, early repayment fees, cheque-cashing fees, and renewal charges, to mention a few. (Yes, there really are more fees.) While you might not see each of these fees when using a payday loan, you are likely to encounter some of them.
In 2010, a law passed restricting the amount in fees that a payday lender can charge. Previous to 2010, a lender could charge upwards of $40 to $45 dollars on a $100 dollar loan over two weeks. Now, Canadian payday lenders are required to charge less than $23 dollars on payday loans for ever $100 borrowed over a two-week period. Each province varies; for example, British Columbia’s limit is $23, while Ontario has the least expensive fees with a limit of $15 per $100 borrowed, which was amended in 2018 from a slightly higher rate.
However, that’s still not great. In fact, it’s downright bad. If you borrow a loan for two weeks to make ends meet, you could end up paying $115 on a $500 dollar loan in some provinces, requiring you to pay back $615 when things are already tight. The harsh reality is that borrowing a payday loan and incurring these high fees is legal, but incredibly difficult to pay back.
Issues to consider before taking a payday loan
If you are in a tight financial spot, have found yourself needing emergency funds to fix a vehicle, or if your fridge has suddenly stopped working, you may feel like you don’t have a lot of options to get cash quickly to remedy the situation.
The most obvious question to ask yourself when taking a payday loan is, “Will I be able to pay back the loan within the allocated time?” If not, stop. Re-think what you’re doing, and opt for another solution.
The second question to ask yourself is, “Will I be in a substantially different place financially, better or worse, at the end of these two weeks?” If your spouse has suddenly lost their job or is being hired on with a large pay raise, you may want to consider how this will affect your ability to repay (or not repay) the payday loan.
Options other than a high fee payday loan
If you are struggling financially, and need money quickly, consider the following options to avoid taking a payday loan:
- Ask your family or friends for help with bills.
- Take a cash advance from your credit card. The interest will begin immediately, but it is far lesser than that of a payday loan.
- Ask for a pay advance from your employer. Employers do not want you to suffer, and while you do not want to make this a repeat request, sometimes an employer can offer a pay advance. This is obviously not always an option since employers also have bills to take care of and likely time their paydays to work around their other bills. They may be able to offer you a small advance, though.
- Request a loan from a line of credit from your bank or credit union. This will take longer than a payday loan, but the interest and fees will be substantially less. Unlike a payday loan, this can take weeks to secure and will require a credit check. Your financial institution does not want to lose customers though, so will often work with you to secure a larger sum that can be repaid over a longer period of time. This sets you up for more financial success than an expensive payday loan.
Financial help is available
If you need help setting up a budget or dealing with looming debt that may be causing you more stress and fear that you can deal with, contact Bankruptcy Canada to set up a no-obligation judgment-free consultation with our debt counselors or financial experts. We can help you get back on your feet so you are no longer borrowing from a payday lender.