The payday loan: Is it a blessing or a curse? Each year, nearly 2 million Canadians use payday loans. This is often because they’re living paycheque to paycheque, and their money runs out before their next pay day.
Other times, an unplanned expense pops up and they have no money set aside to cover it. So, while payday loans may seem to offer some relief, ultimately you could wind up in a worse financial situation.
What Is a Payday Loan?
Also referred to as “Cash Advance Loans,” payday loans are short-term loans of up to $1,500 that come with high interest rates and fees. The loan must be paid back when you receive your next paycheque. If you’re unable to pay it back on time, more fees and interest charges will be tacked on. In certain provinces, you may be able to extend the payback period for up to 62 days using “rollovers,” but that incurs additional fees. Also, many provinces don’t allow you to roll over or extend the payback period on payday loans. We’ll talk more about rollovers in a bit.
Many people turn to payday loans when they find themselves in a desperate situation. While payday loans may seem very attractive at first glance, there’s a catch (isn’t there always?). This is why many people using payday loans find themselves in a cycle of never-ending debt.
How Do Payday Loans Work?
Privately-owned companies offer payday loans in stores and online via an e-transfer to your bank account. While there are no official guaranteed payday loans in Canada, payday loans in general are not very hard to obtain. Here’s how it works in-person and online.
Payday Loans In-Store
When you arrive at the payday loan location, you’ll need to supply lenders with proof that you have a:
- Regular income;
- Bank account; and
- Permanent address.
You’ll also need a government-issued ID showing that you are 18 years of age or older. You may also be required to provide a reference, which will be contacted if the loan is defaulted and the payday lender cannot reach you.
Next, payday lenders will ask you to do one of the following:
- Complete a form that gives the lender permission to withdraw the total loan amount, including fees, directly from your bank account when the loan becomes due (this is often called a pre-authorized debit).
- Provide a post-dated cheque for the total loan amount including fees, which they will cash when the loan becomes due.
With these steps complete, the payday lender will deposit the loan directly into your bank account or give you cash or a cheque. In rare cases, they may only offer the loan on a prepaid card (and it may cost extra to activate and use the card).
Regardless of how they pay you, the lender will require you to sign an agreement documenting the cost of the loan, including interest and fees, as well as the due date. Be sure to review this agreement carefully and ask any questions you may have if something isn’t clear to you. You can find more information about payday lenders specific to your province on the Government of Canada website.
Payday Loans Online
Online payday loans may seem like a more convenient alternative. But you need to be careful; some online payday lenders aren't licensed and don't follow provincial rules, which can leave you unprotected. You can contact your provincial or territorial consumer affairs office to find out whether a payday lender is licensed in Canada.
Lastly, watch out for e-transfer payday loans located outside of Canada. If you encounter a problem with them, finding a resolution may be difficult.
An Example Payday Loan Scenario
“Should I get a payday loan?" This thought may have crossed your mind before. Unfortunately, it can get you into trouble. A recent report found that many payday loan borrowers were unsure of how payday loans work and just how costly they can be. So, here’s a quick example demonstrating the true cost of a payday loan and how quickly fees can add up.
- Your pet needs to go to the vet, which ends up costing you $300—money you don’t have. So, you take out a $300 payday loan for 2 weeks.
- Over that 2-week period, you’ll pay $45 in interest charges ($15 for every $100 borrowed), which works out to an annual interest rate (APR) of 390%! Now you owe $345.
- Of course, you still have to cover all of your everyday expenses, and are unable to save up the $345 to pay back on the loan. Since you can’t make up the payment, you’ll be charged a penalty. Now you owe close to $400.
- You could take out another payday loan to pay off the first one, but then it starts all over again. Now you can see how people become trapped in an endless payday loan cycle.
Perceived Benefits of Payday Loans
For people living paycheque to paycheque, or who have just incurred a large unexpected expense, a payday loan can seem like a “quick fix” and an easy way to get fast cash. Here are four reasons why payday loans can seem appealing to some people.
1. Immediate Cash
Almost half of employed Canadians are living paycheque to paycheque. Everyday expenses take up most, if not all, of our income while the cost of living just keeps rising. When an unexpected bill comes up – a car repair, dental emergency, or leaky roof, for example – many budgets simply can’t take the hit. So, instead some people are tempted to take out a payday loan. All they need to do is provide some information, fill out a form, and voila! Instant money.
2. No Credit History Required
When it comes to traditional bank loans, you're required to prove your creditworthiness to determine the amount of money and interest rate you qualify for. If your credit isn’t great, you likely won’t qualify for the loan at all. However, you don’t need good credit to access a payday loan. You only need the aforementioned items (a job, a bank account, an address, and proof of age).
3. Offers Renewal/Rollover
If you’re struggling financially, you can renew the loan before it's due. This will, however, require you to pay a fee equivalent to the interest you owe, after which you have an additional two weeks to repay the loan with another corresponding interest payment. Alternatively, you can take out a new loan to cover the first one, which also extends your repayment date. Please note that in several provinces, a payday lender cannot extend or rollover your payday loan.
4. Payday Loan Top Ups
There are guidelines, which change periodically, that translate to the maximum percentage of your paycheque a lender can advance you on. (You might notice in the news when these guidelines change that certain payday lenders pay back customers who were charged more than the legal amount of interest within a certain loan period.) If a customer contacts a payday lender wanting $200 but, according to these guidelines, they can be loaned up to $700, they are typically offered the $700 upfront. If the customer doesn't take the full $700, they have the option to top up their payday loan to $700 within that pay period. Most customers top up within the pay period, especially on their first loan, simply because they're in financial situations where they can always use the money.
Why Payday Loans Are Bad
Are payday loans bad? The short answer is: “YES!” Here are seven reasons to avoid them at all costs.
1. High-Interest Charges
Many people don’t understand the actual interest on payday loans. They see $15 for every $100 borrowed and think the interest rate is 15%, which seems reasonable compared to other credit products and interest rates.
However, what most people don’t realize is that the interest rate on their credit cards and other loans is calculated on an annual basis, whereas payday loans are bi-weekly (every two weeks), so $15 for every $100 borrowed actually works out to an interest rate of almost 400%. Depending on the province you live in, the interest rate can be as high as 650% – which is brutal! Also, there are no specific rules for payday lenders in the territories, so fees and interest rates can be extremely high.
2. Limited Amounts of Cash
You can only access a limited amount of cash, which may not necessarily meet your needs. This amount usually ranges from $300 to $1,500, depending on how much risk you pose to the lender and the province you live in.
3. Short Repayment Periods
Typically, you're supposed to repay the payday loan by your next pay day with the next paycheque you receive. Although you can extend the repayment date, there are limits on the number of times you can extend it. This is a sharp contrast to traditional loans, which may have long negotiable repayment periods.
4. No Installment Payment Option
Traditional bank loans offer you the luxury of paying the loan in installments, which both you and the bank agree upon. This offers some flexibility for your budget, which can also lessen the debt burden.
A payday loan, on the other hand, requires that you repay the whole sum, including interest and fees, by your next pay period, which can be a tall order for someone living paycheque to paycheque.
5. They Can Hurt Your Credit
Failure to pay back payday loans can tarnish your credit. While payday loan activity generally doesn't show up on credit reports, if you fail to repay the loan, the lender will usually sell your debt to a debt collection agency that will report accounts in collections to the major national credit bureaus (Equifax and TransUnion).
6. Multiple Payday Loans for the Same Pay Period
The big payday lenders are usually just a kilometer away from each other, which makes it extremely easy for customers to borrow from both during the same pay period. It's sometimes required to provide a recent bank statement showing at least two weeks activity at the time of issuing the payday loan. It's not uncommon for these bank statements to show cheques being put through the customer's account from other payday lenders, which unfortunately, doesn't disqualify them from getting the payday loan. Owing two or more lenders for the same paycheque and/or pay period is a recipe for disaster for the consumer. It makes it nearly impossible to catch up and back back both payday loans, which sets them up for an endless cycle of debt.
7. An Endless Loan Cycle
One of the biggest risks payday loans pose to anyone who uses them is that you can end up in an endless payday loan cycle, where you take out payday loan after payday loan, trying to catch up and pay off the previous loans. Of course, your debt just keeps growing, making it harder and harder to pay back.
A warning would be not to take out multiple payday loans for the same pay period, and avoid taking the maximum amount a payday lender is willing to loan you. Taking the maximum amount a payday lender is willing to lend you is how many people get stuck in a cycle of buying back their paycheques for less than it's worth for years. Re-borrowing is offered as a solution by collectors as well, making it hard for people trying to get out of debt.
How to Pay off Payday Loans
If you’ve fallen down the payday loan rabbit hole that we just described, you probably want to get out of it as soon as possible! So, here are some suggestions on how to pay back payday loans for good!
Ask About an Extended Payment Plan
If you need help paying off payday loans, first try going to the source. Depending on the province you live in, some payday lenders may offer you an extended payment plan (EPP), which gives you more time to pay off your debt. For example, in Ontario a payday lender must provide you with the option of an EPP if you’ve taken out three payday loans within 63 days. Typically, an EPP provides four extra pay periods to pay back the loan without adding more fees or interest. In addition, you won’t be handed over to collections as long as you continue making your payments each pay period.
Sell Items You No Longer Need or Use
If you need a few thousand dollars, could you get by on public transportation for a while if you sold your car for some quick cash? What about electronics, furniture, jewelry, tools, clothing, or old equipment you no longer use?
Sure, parting with certain items can be difficult, but it beats getting collection calls and possibly being taken to court! Plus, getting rid of items you no longer need or use makes room in your life for other things. And any heartache will be fleeting once you’re living debt-free!
Get a Side Gig or Part-Time Job
Depending on your schedule and family responsibilities, a side gig or part-time job will help you pay off your loans faster and accrue less interest. It could be something as simple as bagging groceries on weekends, or dog walking, or maybe you can dive into the gig economy, driving an Uber (you only work when you’re available) or selling your handyman skills on sites like AskforTask or Jiffy.
Dip into Your Savings
Planning for the future is important, but using money that was meant for something else, like a new phone or a getaway, can help put an end to your payday loan crisis. After all, the amount you pay in loan interest rates and fees could add up to more than what you take out of your savings in the long term! But before withdrawing, just make sure you're aware of any withdrawal fees or penalties.
Ask for Help from Family and Friends
Money has been known to damage relationships, so go about this carefully. First, determine how much you can contribute to the loan on your own so you’re asking for as little as possible. Then ask friends and family to make up the difference.
Come prepared with a plan in place for how you’ll repay them; having it in writing will also make them feel more comfortable and will make you more likely to hold yourself to it.
Sign up for a Debt Consolidation Program
While debt consolidation loans exist, you need to have a good credit rating and credit score to get one—something most people who rely on payday loans often don't have. If you have a few payday loans and/or other forms of unsecured debt, including credit card debt, but you don't qualify for a debt consolidation loan, a Debt Consolidation Program might be another option.
A Debt Consolidation Program involves rolling all your unsecured debts into one monthly payment through a non-profit credit counselling agency, like Credit Canada. A certified Credit Counsellor will work with your creditors to help you pay off your debt over time, reduce or stop interest, and provide expert money management advice along the way.
6 Payday Loan Alternatives
Some of the methods listed above are great alternatives to taking out a payday loan (picking up a side gig, dipping into savings, asking for help, etc.). However, below are a few other options to consider.
1. Ask Your Employer for a Partial Paycheque in Advance
Some companies are willing to help their employees out with advanced paycheques, especially if you've been on the job for a while and are a trustworthy employee. Just be sure you have a plan in place to cover your expenses during the period when your next paycheque will be a little lighter than usual.
2. Check Local Nonprofits and Charities
Nonprofits and charities won’t loan you money, but they may help you cover essential expenses, like food, clothing, and public transportation tickets. This way, you can use the money you’d normally spend on essentials to cover the unplanned expense.
Once the unplanned expense is paid for, you can return to your normal spending habits. (And this will be a great reminder of the importance of an emergency fund, so you don't run into the same issue again.)
3. Try Crowdfunding
Depending on the nature of your emergency, you may be able to raise funds through crowdsourcing, like GoFundMe. With GoFundMe, you set your fundraiser goal, tell your story, and upload a photo or video. Then you share it on social media and donors can contribute to your cause.
Of course, most people aren’t going to help out with a car repair; however, there are other emergencies that will make people feel especially generous (for example, medical procedures for a family member or a pet, education expenses for a child, funerals and memorials, etc.).
A word of caution: Don’t take advantage of people’s kindness with GoFundMe to engage in fraudulent claims for personal gain; the site will take swift action and report suspected fraud to law enforcement.
4. Borrow from Your Credit Union
Are you a member of a credit union? These non-profit community-based organizations are designed to help members manage their money and sometimes offer loans, as well as chequing and savings accounts.
They may be your best short-term loan option if you have a steady income and need just a small amount of money. Because of their non-profit nature, fees and interest rates on loans from credit unions are usually minimal.
5.Get a Line of Credit
Your bank may be willing to offer you a small line of credit (a fixed amount of money that must be paid over a fixed period of time at a set interest rate). Bank loans and lines of credit can run anywhere from 3% to 50% interest, but it’s still much cheaper than a payday loan. The one caveat is that you’ll need to have a reasonable credit score to obtain a line of credit.
6. Get a Credit Card Cash Advance
Now, we want to be perfectly clear: we generally never recommend getting a cash advance on a credit card for a few reasons.
First, the interest rate on a cash advance is usually higher than the interest rate charged for regular transactions on a credit card. Secondly, you're charged interest on cash advances the moment you withdraw the cash; whereas with a credit card transaction, you're given an interest-free grace period where you won't be charged interest if the balance is paid in full by the next payment due date. Thirdly, you're usually charged a transaction fee - on top of interest - for cash advances. And finally, you may be charged an additional withdrawal fee if you're using an ATM.
However, using a cash advance on a credit card can still be much cheaper than a payday loan (think ~25% vs. 400%).
If you get a cash advance in lieu of a payday loan, it’s best to do this on a card with no balance and pay it back as soon as possible. The reason for this is because if you get a cash advance on a card that’s carrying a big balance, any payments you make are applied towards the balance first and cash advances last, so the bank can continue raking in the interest on the cash advance amount.
Speak with a Credit Counsellor about Your Payday Loans or Debt Situation
The best payday loans are no payday loans! If you’re knee-deep in debt and you'd like some free expert advice on how to best tackle them, contact us at Credit Canada. We offer free, non-profit debt counselling (including advice on Canada payday loans) and we can talk you through your debt relief options.
Our goal at Credit Canada is that you never have to rely on payday loans again, whether that’s helping you begin budgeting and tracking expenses, setting up an emergency fund, getting you on a Debt Consolidation Program, or helping you rebuild your credit.
Either way, all of our counselling is completely free, 100% confidential, and non-judgmental. Stress-free days can start with just one phone call, at 1.800.267.2272. Or you can book a free online Debt Assessment by clicking here.