How to avoid the perils of payday loans

Our guests, BDO Licensed Insolvency Trustees Paul Ihnatiuk and Rebecca Sudano, have years of experience helping people eliminate unmanageable and overwhelming debt. To learn more about the conversation, read the full transcript below.

Financial Wellness Podcast Transcript

Tera:

Hello. You’re listening to the BDO Financial Wellness podcast, and I’m your host, Tera Beljo. Thank you for joining us. Let me ask you, have you ever been worried that you won’t have enough money to cover your monthly expenses or maybe a large unexpected expense came up or you had trouble finding another job after a layoff? When your bills are months overdue and you’re behind on your rent or mortgage payment, it’s tempting to look for a quick fix. In this episode, we’re going to talk about payday loans. A lot of Canadians rely on payday loans when their credit cards are maxed out and they can’t get approval for a traditional loan or line of credit because of low income or maybe poor credit. A payday loan can look attractive because it looks like it’s an easy and quick way to get cash, but are payday loans a good idea? My guests in this episode are BDO Licensed Insolvency Trustees, Rebecca Sudano and Paul Ihnatiuk. Rebecca and Paul talk to us about the perils of payday loan lending and what you should know before you resort to a payday loan and what to do when your payday loan spirals out of control. Let’s jump right in with Paul and Rebecca.

What is a payday loan?

I’m pretty sure we’ve all driven by a payday loan store at one point or another. Those places offer simple hassle-free loans regardless of your credit or there are websites that offer cash loans, pre-approved online in just minutes. You could sign up for free and even apply from your phone. So, Paul, it sounds very simple, easy money. Why don’t we start by talking about the basics of this type of borrowing. What is a payday loan?

Paul Ihnatiuk:

Well, the concept of payday loans has been around for years and years. The idea is my paycheque is going to be coming up, however, something has come up and I really need to access that money right now. I can’t wait the extra two weeks until my pay comes in. The idea of years ago, you used to just approach your employer and get an advance on your paycheque. However, employers have tightened that up quite a bit. Over the years, companies have taken over this space and really started taking over this space, with what they call predatory lending because they are taking advantage of people who are in desperate situations. The payday loan is, you will walk into this store or, nowadays everything is done online. You walk into the store and say, “I need $200. I’m getting paid in two weeks. How much are you going to be able to give me?”

Of course, every location is going to say, “Sure, here you go. Take the money, then sign on the dotted line.” But that’s really where the problems start with the payday loans is signing on that dotted line because what you’re getting into is a short-term loan with high interest rates, high fees that you’re going to have to pay back in two weeks. The idea is what’s going to happen in two weeks? What’s going to happen down the road? Payday loans sound great. It sounds like it’s going to get you out of trouble. It sounds like it’s going to get you to your next paycheque, but it opens up a can of worms that’s going to create bigger problems if you’re not already in a bigger problem right now.

Tera:

What do you need to get one of these loans, Rebecca?

Rebecca Sudano:

Well, oftentimes they look for proof that you’re going to receive more money in two weeks when the loan comes due. Sometimes they ask for your banking information, which is a little risky because you’re giving access to your bank account sometimes to repay the loan automatically in two weeks’ time. Their intent is this is a one-time loan, they’re going to take the loan out of your bank account two weeks from now. The difficulty as Paul mentioned is in two weeks from now, is your paycheque going to be enough to not just cover the loan, but also the fees associated with borrowing at a high interest rate plus the fees. When the payment comes out of your bank account two weeks later, is it going to leave you short? Often the answer is absolutely.

Tera:

So, we know… Oh yes, Paul?

Paul Ihnatiuk:

I just want to jump in because I just chuckled at what Rebecca was saying with regard to proof of income. If you actually Google some of the payday loan places, a job is not actually required, that there are these lenders now that are lending to people that are receiving social assistance and that are on a disability pension or even on a pension. It’s not just that you require a job. You just have to have some source of money that you are going to be receiving in the near future. This is where a lot of people get into this trap because someone who’s working might be able to make it up later on. However, if you’re on a fixed income, if you’re on social assistance and you need that $200 now, well, most likely that $200 is going to already be allocated for next month.

What is the real cost of a payday loan?

Tera:

Yeah. We know a lot of Canadians are struggling financially right now, like you just mentioned. A payday loan can seem like the only solution when you need to cover expenses until your next paycheque. What should people know before borrowing money from a payday lender, Rebecca?

Rebecca Sudano:

Know what it is going to cost you. Oftentimes we think something is too good to be true. Well, usually it is.

Tera:

Exactly.

Rebecca Sudano:

If you have easy access to money through an online payday loan and you can get $500, $1,000, sometimes as much as $5,000, you need to ask yourself, how much is that actually going to cost me? When we look at cost, we are not just talking about the interest because what tends to happen is, it’s a rolling interest. The amount you borrow plus the interest plus the cost. Then if you’re not able to make that payment, all of that rolls to the next one. What they do generally speaking is they have to re-advance you money. It becomes a little bit of a rolling cycle. As Paul mentioned previously, if you’re on a fixed income and you’ve borrowed your income in advance, how are you actually going to pay back the amount you borrowed plus the interest and the cost? Because your income hasn’t changed. It’s a fixed income. It’s the same amount, but the loan itself is not. Number one, know how much this is going to cost you.

Quick story. I had an opportunity to speak to some students about the cost of buying a television on a payday loan and borrowing the money because the students have income. If they took an advance so that they could buy the TV now, instead of waiting for their next paycheque, how much that TV would actually cost them? When you actually sit down and write down the numbers, it’s astounding because the interest rates are so incredibly high. Paul, you may, in your research have noticed more recently the interest rates vary from province to province because in certain provinces, they have put on rules and restrictions on what the interest rates are. Have you noticed that, Paul?

Paul Ihnatiuk:

I have, and it’s interesting you say research because I live in the city of Hamilton. The city of Hamilton has been on the forefront of trying to tackle the payday loans. In one way, we’re trying to tackle the payday loans, but a former MP here in the city of Hamilton is also the spokesman of the payday loan place. It’s funny to see how that politically the heads are even bashing on this, but it varies from province to province. We’re also talking about different payday loan lenders. We’re talking about one right now that we’re going to be rolling over, but we have to remember that there are multiple places. That is one of the things that the city of Hamilton’s trying to tackle is they are trying to get down to in Hamilton, there is only going to be 15 locations that you can get a payday loan from.

Now, unfortunately, a lot of these places were grandfathered in. I think last time I looked, we’re sitting at 28 and eventually it’s supposed to get down to the 15, but that of course is before COVID hit and now everyone’s looking online, so you don’t need a physical location. It not only varies from province to province, but it could vary from location to location. It’s sad that Rebecca was talking to the students and they realized that after, because I’ve encountered that same thing. One of the things I like to do with my clients, especially the ones that have multiple payday loans is when I was meeting with them face to face, I used to turn my monitor and say, “The payday loans aren’t lying to you. It’s all right there. Let’s go on their website.” And I’ll actually pull out the rate section and that is eye-opening. It’s too bad that people are realizing after the fact.

This is where we’re trying, of course, with this podcast to educate people saying, if you know what a payday loan is ahead of time, then you might look at those other alternatives and then you might want to reconsider going in there or applying online.

Tera:

Rebecca, do you have something to add?

Rebecca Sudano:

And aren’t a lot of the online payday lenders being found to be unlicensed? They don’t actually have to follow provincial rules. I think in some provinces and territories, consumer affairs can actually verify whether a payday lender holds a license. Researching, if you’re going to borrow online, whether they fall into that category and whether they are actually licensed to do that in the province or territory in which they’re practicing. The other risk I believe is out there is the opportunity to borrow from outside of Canada.

Of course, that’s more difficult for an individual to resolve that situation if they run into difficulty because those companies are not bound by Canadian rules.

Tera:

It’s funny that you say that because, I mean, I’m looking at a car right now. I’ve had my car for 12 years. We’re ready to get a bigger car. Our family has grown and how much research we’re putting into purchasing a car. It’s sad that people are in a position that they’re not even able to take the time to put in the research to figure out what those fees are, what is going to happen if they take these because they’re in such a position.

Going back to what you said, Paul, it’s predatory, because it’s almost like these companies know that people are desperate for money in that moment, for whatever the reason, that they’re not going to go to that fees page or go and look at where it’s coming from or whether they’re licensed or unlicensed. It’s great that you guys are bringing both of those up. For example, you brought up, you brought up that there’s lenders outside of Canada online? How would they know whether it’s Canadian or not? Do you know the answer to that?

Paul Ihnatiuk:

A lot of it is going to be research. The website is going to be saying where they’re from. However, we’re still dealing with an unregulated internet and I hate to say it, but there are parts of the internet that are even less regulated where people can turn to. When people are in trouble, when people are worried, they reach for the quickest solution that’s going to bring ease to their mind. This is where these lenders really started because you know what? If you’re lost for money and you’re driving around and you see someone on the side of the road with a spinning sign saying, “Come in and get some quick money to help your problems”, you’re going to do it. If you’re sitting at home watching TV or are on Facebook, and you’re so worried that, where am I going to pay for food? Where am I going to pay for the delivery that potentially could be coming as well and you get an ad that pops up and says, “Quick money, easy access, great solution for you,” you might turn to that because your mind is saying, “I need to resolve this right now. I don’t need this stress in my life. I’m going to take the easiest solution to get the stress out of my life.”

7 ways to avoid a payday loan

Tera:

Makes sense. Let’s talk about other options, Paul. Depending on someone’s financial situation, of course, what are some alternatives then to payday loans?

1. Seek overdraft protection from your bank

Paul Ihnatiuk:

Well, the first alternative…the banks have always provided this type of solution, short-term but people have gotten of course used to it as well. It’s called overdraft protection on your bank account. And I used to work for a bank in the ’90s before the internet became very popular. People used to come in towards the end of the month with their fixed income, can I get an advance? I’m going to tell you right now, it’s a lot cheaper, especially if you’re well-known at your bank, you just need a little bit of help, 21 per cent interest compared to some of these other places that have 700 per cent interest. It’s a great solution, short-term. However, you don’t want to get into the overdraft cycle because that’s the other thing is, what’s going to happen next month? Are you going to be back in front of your banker, again, asking for another $500 additional overdraft? What is going to be happening? Are you going to get into a cycle where 21 per cent interest is going to be too much for you?

Again, it comes down to what is the best option for me? What is the best option for my family? What are the best options that are available out there? It really comes down to financial literacy here in Canada. Where do I turn to? Where should I go? What should I do? As I said, the bank is always the first place we always tell people to sometimes talk to because you have a relationship there. They want to help you. You can actually talk to someone about the various options. If not that, you know what? Take a look, your entire financial situation. Why are we concerned about $200 short term when you may have other outstanding credit card debts, you may have other outstanding loans that are out there that you’re struggling?

Are you robbing Peter to pay Paul as well? Are you taking out a payday loan so you can cover your personal loan? Now’s the time. If you’re struggling to take a look at your entire financial situation and see if you can come to some solution that’s going to not only help you in a short-term, but long-term.

2. Ask friends or family for financial help

Tera:

Rebecca, what about other options? Friends and family, for example, or marketplace on Facebook. What about those things?

Rebecca Sudano:

Yeah, so often we don’t want to talk about money with friends and family.

Rebecca Sudano:

But if we look at what we’ve spoken about earlier in this podcast, where we talk about what state of mind a person may be in at the time that they take a payday loan. We have to ask ourselves whether or not we’re in a vulnerable situation where actually that would be a good time to speak to friends and families. Often, they may be able to bring to the forefront of your mind some of the things that we have mentioned that perhaps because of the emotional state, you’re not able to see for yourself. That’s okay because sometimes a family member or a friend may be able to actually give you that $200 on a short-term basis and not charge you the exorbitant amount of interest.

3. Sell some of your possessions

The other option is, as you mentioned, the marketplace. Marketplace is a great opportunity to post items that perhaps you don’t need anymore. We get a lot of social media information on being a minimalist and looking at our location, our apartment, our room to see whether there’s things in there that we don’t need, but others may benefit from. Marketplace gives you the opportunity to do that and actually receive money for doing it.

4. Explore debt solutions with a Licensed Insolvency Trustee

If you’ve gone through those stages and still find that you’re struggling, it may be worth a free consultation with a Licensed Insolvency Trustee to learn about all the other options that are available. In local communities, there may be a credit counselling agency, but a Licensed Insolvency Trustee has the wide broad range of information to be able to look at the whole situation.

As Paul mentioned, it, isn’t just about making that quick fix. It’s about looking at something that’s other than a Band-Aid and providing a solution that’s going to get individuals out of the cycle, rather than facilitating the continuing cycle.

5. Consider a consumer proposal instead of a payday loan

Tera:

Well, speaking of a broader or bigger solution, can you speak to specific situations where a consumer proposal would be the better solution to eliminate payday loan debt or when a bankruptcy would be the best choice, Paul?

Paul Ihnatiuk:

Well, it comes down to personal situation, whether it’s consumer proposal and bankruptcy, both are solutions that are available. I always talk to people and always mention that, your financial situation is unique. We have all these different solutions, but your situation is going to be unique to your situation. When you’re looking at a consumer proposal, I like consumer proposals because it’s going to get you that budget help as well as take care of your financial situation If you’re turning to different cash places right now, you’re having trouble with your budgeting. That’s part of the problem right there is if we can get you on a proper budget, take care of your proper financial situation, look at the big picture, gets you on a payment plan, well, we’re starting to talk about consumer proposal there. That’s the perfect opportunity.

Instead of calling it a consumer proposal, sometimes we need to call it a financial rehabilitation plan. That might be the better way.

Tera:

That’s awesome.

Paul Ihnatiuk:

Let’s take the word consumer proposal right out there. It’s a unique plan that’s situated to you. We’re going to help you with your debt. We’re going to help you with your budget and we’re going to make sure that you don’t get into this cycle again.

Rebecca Sudano:

Paul, there’s no minimum amount of debt that you can file a consumer proposal for. I often speak to individuals who are overwhelmed with debt, the amount of debt that they’re in, I find it doesn’t matter because if you are on a fixed income and you owe $5,000, that’s overwhelming. You can file a consumer proposal if you owe $5,000. It’s no different than an individual with $100,000 worth of debt who has an income of $50,000 because debt is not capped at the amount of the debt. It’s capped at your ability to pay the debt.

Tera:

I love that.

Rebecca Sudano:

A consumer proposal is adaptable to anybody who has any type of debt. Isn’t that right, Paul?

Paul Ihnatiuk:

It is. We talk about taking care of this situation now, but part of consumer proposal, and you know this, when you meet with your debtors, that you discuss your counselling with, you’re going to talk about things like emergency funds and consumer proposals. You’re all going to talk about emergency funds and bankruptcies. We’re going to build someone up so that, you know what? If they come in down, they need a payday loan, again, in the future, they’re going to say, “Hey, I’ve already planned for this in the future. It’s proper planning.” That’s really what a consumer proposal is, is proper planning for the future to say, I’ve gotten to this point, yes, things have happened in my life, but I’m going to show the creditors, I’m going to show myself that this isn’t me. I can get out of this. I just need a little help and a little guidance. That’s what a Licensed Insolvency Trustee is there for, for that little bit of help and that little bit of guidance to get you on your feet so that you can recover financially.

6. Consider bankruptcy to eliminate payday loan debt

Tera:

Now, a lot of people are scared of this word and of this process. Let’s talk about bankruptcy as an option. When does that come into play, when it comes to payday loans and debt, Paul?

Paul Ihnatiuk:

Well, what we’re seeing, and I see this quite a bit with when it comes to a bankruptcy and people with payday loans is these are the situations where someone might have had multiple, multiple payday loans, that their debts have gotten to that point that they’ve gone knocking on every door here in town and got an advance from everywhere. Their situation is that they need a financial rebirth, that’s what I tell people what bankruptcy is. Bankruptcy is a financial rebirth. It’s not an end. We’ve gotten to this point that you need to say, “Hey, I need to start again. I need to do this again. I can do this with some help this time” because what we find is a lot of people…Bankruptcies happen because life events happen. Well, that’s why payday loans are there to take advantage of those life events that you didn’t expect.

We’ll help you out with that. A lot of bankruptcies are because life has come in the way. All the planning that you’ve made, all your intentions were great, but this has happened. Bankruptcy is going to turn around and it’s going to help you. Again, we’re going to help you. I find bankruptcy is a bit more stricter on budgeting because we work with people on a monthly basis with a budget. Where the consumer proposal, we put a budget in place. We have a couple of financial counselling sessinos. No, in a bankruptcy, we’re saying, you send us your monthly budget. We’re going to take a look at that. If you’re struggling, if you don’t know, if you’re not negative on your monthly budget, let’s sit down. Let’s talk about where you can go from here. Let’s talk about your expenses. If you think about bankruptcy, it’s really getting down to the basics and it’s the rebirth that’s going to happen.

You know what? If people think that bankruptcy is the end, well, you look at various… Look at it in the States, and I hate to bring up this example. When you have someone elected as president who has been bankrupt a couple of times, that’s probably the worst example to use. I’m sorry about that. But bankruptcy happens. People can get rehabilitated.

Tera:

And become president.

Paul Ihnatiuk:

Oh yeah, and people get rehabilitated quickly, if you need to start all over again. But the thing is you may come into our office and say, “Paul, I want to talk about bankruptcy.” we’re going to talk about all the various options for debt relief, and we might end up with a consumer proposal, but I have those individuals that come in and consumer proposal in their mind. I talk about what their bankruptcy would look like. They say bankruptcy is the best option for me.

7. Take a cash advance on your credit card

Tera:

Now, and before I let you both go, I want to circle back to something, credit cards versus payday loans. If I am in a situation where I’m struggling and, like you said, I need $200 quick cash, why is credit cards a better option than a payday loan? Rebecca?

Rebecca Sudano:

If you have the opportunity to cash advance on your credit card, the interest rate on your credit card is still going to be less than a payday loan, in most situations. What you have to remember with a cash advance is that when does the interest begin to be charged because it’s different for every credit card and it’s different than when you make a purchase on your credit card. Again, as Paul mentioned earlier about payday loans, it’s reading the agreement of your credit card, which of course we don’t always do when we’re in an emergency situation. We just need the cash.

If we strictly just look at the interest rate, generally speaking, the interest rate on your credit card is going to be considerably less than the interest on a payday loan. It’s still a Band-Aid, yet just as an overdraft is still a Band-Aid. I think we go all the way back to what caused the situation, which as Paul mentioned. It could be a life event and life does happen. It’s then looking and saying, “What is the best solution for getting myself out of this situation? And begin to eliminate the choices. If you find yourself in a situation where you need to do that cash advance, likely the interest is going to be less than on a payday loan.

Before you take out a payday loan, ask yourself…

Tera:

I’m going to ask you both a question that is not on the list of questions I gave you. A customer or a potential client standing at the door of a payday loan office, what’s one thing that you could say to them, Paul and Rebecca… I’ll let Paul go first, and then Rebecca. If you could say one thing to them before they opened up that door and walked in, what would it be?

Paul Ihnatiuk:

Give yourself some time. Sleep on it. If you have the ability, think about what you’re about to do, because you’re going to go in there. You’re going to sign documents, and most of the people will sign that document and walk out. If you have the ability to take your time, not only do you think about it, but to take a look around, take a look at what they’re presenting you as far as the documentation, take a look across the street to see, is there a bank across the street? Maybe I’ll just jump in there and talk to them. Life is fast, but sometimes we do need to take that extra moment and have a pause for thought, because the solutions are there. You feel like there are no solutions.

Tera:

Rebecca, do you have anything to add to that?

Rebecca Sudano:

I would ask two questions. Is it a need? Or is it a want?

Tera:

That’s a good one.

Rebecca Sudano:

Often what we think is a need is actually a want. Is it a need? Is it a want? if you establish in your brain that it is a need, I absolutely agree with Paul. You need to take that few moments, a day, to really think about, is going and getting the payday loan to be able to pay the need going to give me the relief of the need? Is the need emotional or financial? And what is going to be the consequence of that action?

Tera:

That is fantastic. Thank you so much for your time today. It was really very interesting and educational for me. I hope to do this again with you both. Thanks.

Paul Ihnatiuk:

Thank you.

Rebecca Sudano:

Thank you.

Tera:

Once again, I want to thank my guests on this episode about the perils of payday loans, BDO Licensed Insolvency Trustees Rebecca Sudano and Paul Ihnatiuk. If you are looking for more Financial Wellness Podcasts, videos, debt management resources and tools, please visit our website, debtsolutions.bdo.ca. Remember, we are here to help you turn the page on debt. Your next chapter is waiting.