How to avoid the dangers of payday loan debtDec 13, 2018
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 worst kind of the debt you can have.
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 super expensive and extremely time sensitive.
Let’s deal with the term of payday loans first.
Payday loan debt 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 a called a “pre-authorized debit” which allows the lender to withdraw the repayment directly from your bank
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. Otherwise, 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
For a true story about holiday spending and payday loan debt pain, learn about what happened to Robbie McCall when he used a loan from a cash store to buy a Christmas present for his daughter.
Now for the cost of a payday loan. Brace yourself.
Payday loans are the most expensive loans you can get.
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! Credit cards and credit card cash advances can typically range from 15 to 30
Watch this informative video by Preet Banerjee from the Globe and Mail to find out how to calculate interest on a payday loan.
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).
Read more about payday loans and their high fees on the Financial Consumer Agency of Canada’s website.
The trick is to find alternatives to payday loan debt.
Payday loan centres lure us in because they are in the business of being handy, easy to use and customer oriented. It also helps that they are almost everywhere, especially in low-income neighbourhoods. It’s why municipalities are trying to limit their numbers and educate the public about the dangers of using them.
Here are some alternatives and ways to change your perspective:
- Try talking to your family and friends if you are struggling. They might be able to lend you some money or assist you in other ways, like helping you with your budget and providing career advice and moral support.
- 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 due date and keep your word. It’s important to correct the issue so that it’s not happening every month.
- Even if you feel like there is no place to cut back, have another look at your expenses. Are you paying expensive bills for things you don’t really need? Can you switch to a less expensive phone plan? Can you cut back on cable or eliminate a streaming service? Do you need two vehicles? If you live in the city, you may be able to get by on public transport and some patience.
For a great list of things to cut back on, TheSimpleDollar.com discusses 40 ways to save money on monthly expenses.
- 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. 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.
Using a payday loan to help with your holiday spending is definitely a bad idea. But the truth is that payday loans are a problem that
If you are already experiencing payday loan debt pain, find out how you can take back control of your finances.
Are you experiencing holiday spending stress? We are always discussing tips and advice for making better debt decisions. Connect with us on Twitter using #HolidaySpending #LeaveDebtBehind or join our