Why Credit Counselling Doesn’t Help With Payday Loans

It’s a common occurrence for individuals struggling with credit card and other debt payments to resort to payday loans as their last option. A staggering four out of every ten individuals seeking our assistance use payday loans in addition to other unsecured debt. The question then arises: “What’s the best solution when ensnared in the payday loan trap – credit counselling or a consumer proposal?”

In this comprehensive guide, we’ll explore Why Credit Counselling Doesn’t Help With Payday Loans and why a consumer proposal might be a more effective solution for debt elimination.

The Payday Loan Cycle: A Hard-to-Break Habit

Let’s introduce you to Clive (name changed for confidentiality), a typical case of someone entrapped in the payday loan cycle. Clive approached a credit counselling company in 2018, weighed down by 11 different payday loans amounting to nearly $16,000.

How did Clive end up with so many payday loans? It’s a straightforward yet unfortunate process. Like countless others, Clive took her first payday loan to tide her over until the next payday. However, this left her short of cash the following pay period, forcing her to take another payday loan to repay the first and additional funds to cover her rent.

Online payday loan lenders like MOGO, Credit700.ca, and BC-Loans.com don’t report to your credit bureau. Consequently, there is no registry to show that you already have multiple loans outstanding. Thus, the cycle continued until Clive found herself in a financial whirlpool.

Credit Counselling: A False Hope?

Clive hoped that credit counselling would help her consolidate her debt into one manageable monthly payment, spread over a period of five years (60 months). She thought this would break the vicious payday loan cycle and allow her to regain financial stability. She, therefore, signed up for a debt management plan.

Payment Schedule          | Duration        | Monthly Payment
------------------------- | --------------- | ---------------
Months 1-5                | 5 months        | $916.00
Months 6-10               | 5 months        | $693.00
Months 11-12              | 2 months        | $521.00
Months 13-18              | 6 months        | $465.00
Months 19-36              | 18 months       | $318.00
Months 37-41              | 5 months        | $242.00
Months 42-60              | 19 months       | $145.00

Surprisingly, the debt management program created by her credit counsellor was unaffordable and ineffective. Here’s why:

  1. The initial payments were front-end loaded, making them higher than what she could afford.
  2. Credit counselling would still require Clive to make payments totaling $15,897.71, inclusive of interest and counselling fees of $6,578.
  3. The debt management plan did not include Clive’s other debts, meaning she would still need to keep up with those payments.

A Comprehensive Debt Assessment: The First Step to Freedom

When Clive approached us seeking help with her payday loans, we conducted a thorough debt assessment. We reviewed all her debts to determine what she could realistically afford to repay. The assessment showed that she had $71,000 in unsecured debts, including:

  • Payday Loans: $19,000.
  • Bank Loans: $39,700.
  • Credit Cards: $5,000.
  • Tax Debts: $3,900.
  • Other Financing Loans: $2,500.

Clive’s financial situation made it impossible for her to keep up with all these payments. Based on her monthly income and debts, she could propose a settlement to her creditors of $420 per month for 60 months. This would cover all her debts, with her repaying a total of $25,200, which includes all fees and costs to eliminate $71,000 in debts.

Consumer Proposal: A Cheaper Alternative

When dealing with sizable debts, including multiple payday loans, a consumer proposal is almost always the more affordable alternative. A proposal allows you to negotiate a deal to pay less than the full amount owing, while a debt management plan requires you to repay 100% of the debt plus fees.

It’s essential to note that a consumer proposal’s monthly payments are significantly lower than those required in the first 18 months of a debt management plan, which only accommodates payday loan debt.

Clive’s Story: A Case for Bankruptcy

Ultimately, Clive filed for bankruptcy, given her unstable income situation. It was clear from our discussions that bankruptcy was a better option for her than a debt management plan.

Conclusion: Choose the Right Plan

If you, like Clive, are dealing with complex debts, including payday loans, we recommend seeking advice from a Licensed Insolvency Trustee to review all your options and determine the best plan for your financial situation.

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