When an emergency happens and you don’t have a good credit score, what can you do?
You have probably noticed that many companies offer “last-minute emergency cash” and loans that you can take out “within minutes,” with “no paperwork needed.” These types of loans are known as payday loans or installment loans.
Payday loans and installment loans aren’t exactly the same thing. Different rules apply to each type of agreement, but they are both two forms of private lending that target people who are experiencing financial difficulty, have poor credit, and charge extremely high-interest rates.
An installment loan is a general term that can refer to any time of loan that you pay back over time with regularly scheduled payments or installments. The difference between an installment loan and a regular personal loan, however, is that people take out installment loans through third-party lenders and not their personal banking institution, which is why interest charges are much greater.
A payday loan is a short-term loan issued by an alternative lender. A payday loan is usually a smaller amount and is paid back by your next paycheque or after a 2-week period.
One of the main characteristics of both installment loans and payday loans is that they are both very quick, with very little paperwork.
Nowadays, many alternative lenders also offer their services online. You complete a questionnaire, provide your banking information, proof of employment and, in a few hours, the money is deposited into your bank account.
The speed of these lending services is also one of the major risks associated with payday and installment loans. Customer service representatives are often available 24∕7 and can approve your loan before you have the time to consider the pros and cons, explore other options, and get advice from a debt professional.
There are two main differences between installment loans and payday loans: the amount you’re looking to borrow, and the interest rates the lending company can charge. Installment loans and payday loans are regulated differently.
| Payday loan* | Installment loan* | |
|---|---|---|
| Typical loan amount | $1,500 maximum | Up to several thousand dollars |
| Interest rate | 500-600% | 60% maximum |
| Repayment period | Typically 14 days | Regular payments over a longer period of time |
| Credit check? | No, just paystubs and banking information | No, just paystubs and banking information |
| Repayment method | Auto withdrawal from you bank account | Auto withdrawal from your bank account |
| Additional fees | Brokerage and administration fees | Brokerage and administration fees |
*Do you live in Quebec? The laws governing private loans are different in Quebec than in the rest of the country. Lenders are not allowed to charge an annualized interest rate of more than 35% and the amount you can borrow for each loan cannot exceed $1,500. But borrowers beware, many lenders find ways to skirt the rules, with tactics that include dividing contracts and pushing you into new loans once you become a client.
A major risk with payday loans is falling into the payday loan debt spiral.
Remember that payday loans are only meant to tide you over until your next paycheque, which means that you need to repay the loan, in full, plus interest and fees, in as few as 14 days. So if you borrow $1000, you will need to subtract this and more from your next pay.
If your cash flow is already tight, will you be able to repay the loan on your next paycheque, while making all your other financial obligations?
Customers who find themselves unable to repay the loan in full will often visit another alternative lender to repay the initial payday loan. And so the debt spiral begins.
When you’re low on money and aren’t able to make ends meet, alternative lenders may seem like a good idea. But here are some steps to take before incurring a payday loan or an installment loan.
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.
Can you eliminate certain expenses that will free up some cash? Tracking your monthly expenditures, cutting down on non-essential spending and downsizing your expenses can often go a long way.
A Licensed Insolvency Trustee can 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 substantially lower your monthly payments.
