August 20, 2021
Payday loans can be tempting for anyone struggling with their cash flow, but they come with serious risks and can become a big debt trap. Here are the best ways to avoid payday loans.
In times of financial strain or unexpected expenses, the allure of payday loans may seem like a quick fix. However, while these loans offer easy access to cash, they often come with exorbitant interest rates and fees that can trap borrowers in a cycle of debt.
Payday loans typically target people facing urgent financial needs, promising immediate cash without stringent credit checks. The large interest charges though make these loans incredibly dangerous. It’s important to understand why these loans should be avoided and other options that can be used in their place.
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 percentage rate (APR) in 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 $14 to $25 for a $100 two-week payday loan. Here is a list of payday lending rules by province.
As part of its 2023 budget, the government of Canada announced its intention to crack down on the payday loan industry. These changes came into affect January 1, 2025.
Payday loan lenders are now required to charge no more than $14 for every $100 borrowed, that’s an annual percentage rate (APR) equivalent to 365% interest. Making these loans still incredibly risky to use. Newfoundland and Labrador was the only province to have this rule prior to the changes.
That’s not the only change the government has made. It also amended the Criminal Code to lower the criminal rate of interest on payday loans to 35% APR.
On its face, these changes seem contradictory; allowing lenders to charge $14 for every $100 borrowed seems to fly in the face of the 35% APR cap.
Payday loans are tricky, as you’ve likely noticed, so it’s not as simple as that.
The $14 that’s now charged for every $100 borrowed is a fixed amount.
The APR represents the total cost of borrowing for one year. This includes the interest rate and any other charges related to the loan.
So, the $14 cap will be a cap on the fees that payday lenders can charge, and the 35% APR is total cost to borrow, including fees and interest annually.
Keep in mind that even with these changes, payday loans are still incredibly risky and should be avoided.
It’s very hard to get a payday loan in Quebec, as strong consumer protection laws make it hard for payday lenders to operate in the province. One of these is a cap on the annual interest rate and any associated fees of 35%. The federal government’s new changes bring it in line with Quebec.
Before you decide that a payday loan is the best route for you, consider these options.
One of the most effective ways to steer clear of payday loans is to revamp and optimize your budget. Budgeting empowers you to take control of your finances by prioritizing essential expenses and reducing the likelihood of needing emergency loans.
Start by conducting a thorough assessment of your income and expenses. Determine your fixed costs such as rent, utilities, transportation, and groceries, and factor in variable expenses like entertainment and dining out.
By doing this you’ll see areas where you can save money and set it aside to help with your bills.
Before you resort to getting a payday loan, consider having an honest conversation with family or friends about your situation. 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.
They may even be willing you lend you money in the short-term if they can expect to be paid back, and they’re unlikely to charge you any interest.
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. Being proactive and reaching out before the bill comes shows your creditors that you are taking responsibility for your financial situation.
Additionally, some creditors may offer hardship programs or modified payment plans to help you manage your payments during challenging times. Open communication with creditors can prevent missed payments, late fees, and negative impacts on your credit score, promoting better financial health overall.
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.
Overdraft protection can be especially helpful if you want to avoid a payday loan.
Banks offer overdraft protection to help cover transactions when you don’t have enough money in your account. For example, if you have $50 in your account and buy something for $60, the bank will cover the extra $10.
This service isn’t free, the bank will charge you a fee for covering the purchase plus interest, but it will be significantly less than the fees associated with a payday loan.
The level of overdraft protection varies from bank to bank, most have a protection limit between $100 and $250.
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 to 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. A Licensed Insolvency Trustee can help you negotiate with your creditors and work to lower the amount you owe. They also have tools at their disposal, such as a consumer proposal, that can prevent your wages being garnished or your creditors taking legal action against you for the debt. The first consultation is free of charge.
August 20, 2021
Payday loans can be tempting for anyone struggling with their cash flow, but they come with serious risks and can become a big debt trap. Here are the best ways to avoid payday loans.
