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August 12, 2021
Are you thinking of getting a payday loan to cover your expenses until your next paycheque? A payday loan might seem tempting.
Are you thinking of getting a payday loan to cover your expenses until your next paycheque? 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 medium-size loans. Do a simple online search for payday loans and you will find countless websites that offer cash loans, approved in minutes. But you should know that payday loan debt is the most expensive kind of debt you can have because of the extremely high interest rates.
If you are dealing with the affordability and debt challenges that so many Canadian households are experiencing, you may think you need the extra cash a payday lender is offering. But you should avoid this type of bad debt that is extremely expensive and time sensitive.
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, one of the conditions of your loan 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.
Payday loan companies often try to hide how expensive their loans 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.
Before you decide that a payday loan is the best route for you, consider these options.
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 this year, you’re likely not alone. The pandemic has left many households feeling financially stretched. Family and friends can be a great source of support any time you’re feeling overwhelmed by your financial problems and can support you in finding the right debt solution.
If you are having trouble making a bill or credit card payment, try talking to your creditors. Most creditors will understand your situation and work with you by extending your due date. The same may be true of your landlord. Just remember to have that discussion before your rent is due and keep your word. It’s important to correct the issue so that it’s not happening every month.
If you are in a bind and must borrow money, learn about your options for credit. 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, consider speaking to your employer about getting a short-term advance on your wages or cashing in a few vacation days. If you have the skills and the time to take on additional work, you might also consider freelancing or working a part-time job evenings or weekends.
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. Filing a consumer proposal can substantially reduce your unsecured debts, freeze interest charges and lower your monthly payments.
Given the choice, most people would prefer to avoid payday loans. Unfortunately, when your credit is poor and you are unprepared for a large expense, a payday loan may seem like the only option. An emergency fund can help you prepare for the unexpected.
It takes time and patience to build a healthy emergency fund. Most financial advisors recommend setting aside 3–6 months' worth of expenses. But even a much smaller emergency fund can help you pay for a surprise vehicle or home repair. During a layoff, a more robust emergency fund can temporarily cover the costs of groceries, rent and utilities. The point is to get started as soon as you are financially able to. Every contribution helps.
Using a payday loan is never a good idea. For people who regularly rely on cash stores and quick online loans, the likelihood of getting into a payday loan debt trap is extremely high. With so many Canadians already living paycheque to paycheque, payday loans are not the answer.
Before you reach for a payday loan, reach out to a professional. Book a free, no-obligation consultation with a Licensed Insolvency Trustee today.
August 12, 2021
Are you thinking of getting a payday loan to cover your expenses until your next paycheque? A payday loan might seem tempting.
