Payday Loans: Considering Alternatives
Life is unpredictable and financial emergencies can occur at any time. Perhaps you have rent due or unexpected bills piling up, and you’re cash-strapped. It’s tempting to consider payday loans as a short-term solution. However, these can set you back significantly in terms of borrowing costs and can potentially lead you into a deeper financial abyss. Fortunately, there are alternatives to payday loans that can provide relief in a financial crunch.
Understanding Payday Loans
Payday loans are small, short-term loans typically required to be paid back within 14 to 28 days. Lenders often do not perform a credit check before lending, they simply require proof of income and bank account details. However, the convenience of payday loans comes with a high price tag.
The Cost of Payday Loans
While the maximum amount that can be borrowed is $1,500, the cost of these loans is exorbitant. Under the law in BC, the maximum a payday lender can charge for a loan is 15% of the principal amount. This may not sound substantial, but when compared to other forms of borrowing, it’s a steep price to pay.
Here’s how it breaks down for a $300 payday loan:
- The 15% charge is $45.
- The annual percentage rate (APR) for a 14-day loan is around 391%.
- In comparison, the rate on a typical bank credit card is around 20%.
To put it in perspective, using a payday loan for two weeks is about 20 times more expensive than using a credit card and 50 times more expensive than borrowing from a line of credit.
Please note: These costs are based on the following:
- The annual interest rate charged on borrowing from a line of credit is typically 7%.
- The annual interest rate charged on making a purchase with a credit card is typically 20%.
- The annual interest rate charged on taking a cash advance with a credit card is typically 20%, in addition to a $5 fee.
- A payday loan costs $15 per $100 that you borrow; for a 14-day loan, that translates to an annual interest rate of 391%.
The Risks of Payday Loans
If you fail to repay the payday loan on time, the lender can charge additional fees. The law in BC allows lenders to charge interest at a rate of 30% per year on any outstanding amount after the loan is due. Furthermore, they can also charge a one-time $20 fee for any dishonoured cheque or pre-authorized debit.
Borrowing repeatedly from payday lenders can lead to an endless cycle of debt, often referred to as the payday loan cycle. Credit counsellors report that clients with payday loans typically have three to five loans when they arrive for counselling, often using new loans to pay off existing ones.
Alternatives to Payday Loans
Thankfully, there are less costly options if you need money urgently.
Credit Cards
One of the best options if you need money right away is a new credit card. Most major banks offer promotional rates for the first few months. Paying down your credit before the promotional period ends can help you save money and build your credit score.
Secured Credit Cards
If you have bad credit, one option is taking out a secured credit card. Many major banks offer secured credit cards to higher-risk borrowers. The approval process for these cards is much less strict, but the issuer usually requires a cash deposit as a guarantee of on-time payment.
Line of Credit
A line of credit is another good option. Consider opening a small line of credit when you don’t need it and have good credit. This will provide you with a safety net to use instead of resorting to high-interest credit cards or payday loans.
Wrapping Up
If you’ve already taken out a payday loan, you may have the right to cancel it within two business days of taking out the loan. You may even be able to cancel the loan outside of the two-day cooling-off period if the lender didn’t adhere to all the required regulations.
In conclusion, while payday loans may seem like an easy way out of a financial bind, they often lead to a cycle of debt. It’s essential to explore all other alternatives before resorting to this high-cost form of borrowing.
