5 ways to avoid payday loan debtDec 21, 2020
Are you thinking of getting a payday loan to help you with holiday expenses? A payday loan might seem tempting. It’s hard to walk down the street these days without noticing a cash store that specializes in these small to mid-size loans. But know that payday loan debt is the most expensive kind of debt you can have because of the high-interest rates.
With the holidays just around the corner, you may think you need the extra $500 they’re offering. Who doesn’t feel the squeeze this time of year? But you should avoid this type of bad debt that is extremely expensive and time-sensitive.
How does a payday loan work?
A payday loan is very easy to acquire: all you need is a steady job, a bank account, and an address. No credit check required. But a payday loan is only meant to tide you over until your next paycheque. This means that the term of your loan is usually around two weeks. You can borrow, for example, $300 for 14 days, which is a very short turnaround time.
You will need to pay this amount back, in full, plus interest once the term is over. So you need to subtract $300 plus around $63 from your next pay. In fact, part of your loan conditions is to either provide a post-dated cheque for the total loan amount or consent to what is called a “pre-authorized debit” which allows the lender to withdraw the repayment directly from your bank account when the loan is due. This makes it easier to forget about the due date and increases your chances of defaulting on repayment. Things get very expensive when this happens.
If your cash flow is already tight, do you think you’ll have an extra $363 (plus some to spare) on your next paycheque? Be honest. If you cannot repay that amount on time, you run the risk of getting yourself into a debt trap or a debt loop, where you’re continually borrowing from somewhere else to pay back your initial payday loan.
How much does a payday loan cost?
Payday loan companies often try to hide how expensive they really are. Instead of giving you the amount of annual interest you pay (like most lenders), they will give you a dollar amount for the amount borrowed. For example, “borrow $300 for only $60 for 14 days.” $60 may not seem like a lot, but it amounts to an annual interest rate of 600 per cent! In comparison, credit cards and credit card cash advances can typically range from 15 to 30 per cent.
Keep in mind that payday lending rules vary from province to province, ranging from $15 to $25 for a $100 two-week payday loan. Here is a list of payday lending rules by province. If you live in Newfoundland, there isn’t much regulation as of yet on payday loan debt. So beware: you’re even less protected from high fees and rollovers (taking the debt you can’t pay and putting it into an even bigger loan with added fees). You might be at a higher risk if you have a low credit score or recently lost your job.
5 ways to avoid payday loan debt
1. Try talking to your family and friends.
Before you resort to getting a payday loan, consider having an honest conversation with family or friends about your situation. If you’re having difficulty finding extra funds for gifts and holiday extras this year, you’re likely not alone. The pandemic has left many households feeling financially stretched. Even after the holidays, family and friends can be a great source of support any time you’re feeling overwhelmed by your financial problems. Talking about your financial problems with a loved one can be a great source of comfort and can spur you on to find the right debt solution.
2. Contact your creditors.
If you are having trouble making a bill or credit card payment, try talking to your creditors. Most creditors will understand your situation and will work with you by extending your due date. The same may be true of your landlord. Just remember to make arrangements before your rent is due and keep your word. It’s important to correct the issue so that it’s not happening every month.
3. Review your expenses one more time.
Even if you feel like there’s no place to cut back, have another look at your expenses. Can you switch to a less expensive phone plan, cut back on cable or eliminate a streaming service? It can be easy to lose track of spending and expenses, so if you haven’t closely reviewed your budget in a while, it’s worth your while to take this step.
4. Explore other options for credit.
If you are in a bind and must borrow money, learn about your options. There are much cheaper ways of borrowing money than going to a cash store and getting a payday loan. Your bank might be able to offer you a line of credit, overdraft protection or a cash advance on a credit card. If poor credit is stopping you from accessing these more affordable types of credit, you should speak with a debt professional.
5. Speak to a debt professional.
If you can’t make it to your next paycheque without relying on credit to make ends meet, it’s time to meet with a professional. A Licensed Insolvency Trustee will review your situation and speak to you about debt solutions that are much less expensive than a payday loan.
Using a payday loan to help with your holiday spending is definitely not a good idea. But the truth is that payday loans are a problem that goes well beyond holiday expenses. People often rely on cash stores as a last resort to help pay for ordinary living expenses, like groceries, rent, and utilities. If this is the case, the likelihood of getting into a debt trap is extremely high. When many Canadians are living paycheque to paycheque, payday loans are not the answer.
Are you experiencing holiday spending stress? Don’t get caught in an endless payday loan cycle. A Licensed Insolvency Trustee can help you turn the page on debt.