August 03, 2017 | By: Doris Asiedu

Payday Loans: The Good, the Bad and the Ugly

Payday Loans

Many times, people turn to payday loans when they need cash and need it fast. In an emergency situation, when there simply isn’t time to consider or even search for other options, payday loans do provide a quick fix. But the repercussions and inherent risks of being at the mercy of high interest rates and a lengthy game of catch-up make it difficult to bounce back from. If you aren’t able to pay the loan back immediately, there is help available.

Risks of Payday Loans

When you're in a situation where you need extra cash immediately, a payday loan can provide some relief, but it's very, very short-lived. You can quickly find yourself in a larger mountain of debt you just can't seem to pay off, and it keeps growing at an alarming rate. Now you've got your regular monthly expenses to take care of on top of the payday loan you need to pay back, plus the interest! That's a very tall order, even for the best money managers out there. So before you feel the need to take out yet another payday loan, let's take a closer look at what you're really getting yourself into—the good, the bad, and the ugly.

The Good: Payday Loans Provide Fast Cash

Let’s be honest, you simply can’t predict your car breaking down or your basement flooding. Perhaps the only redeeming factor of payday loans is that you have speedy access to getting cash. As long as you have a valid ID, pay stub, post-dated cheque, and proof of an open bank account, you should be able to get a payday loan.

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If you don’t have any other options, payday loans might seem like a good temporary fix… but it is a double-edged sword. If you take one out, be prepared to pay it off completely within your next pay period, or else you’ll suffer penalty fees and added interest. There’s also a very high risk of falling into the dreaded payday loan cycle. This is when you’re stuck getting payday loan after payday loan as you fall deeper and deeper into debt, which locks borrowers into a cycle of financial distress and payday loan dependency, often resulting in personal bankruptcy.

The Bad: Payday Loans Have Extremely High Interest Rates

Payday loans aren’t just expensive, they’re also exorbitant with how much interest you might be charged on top of your loan amount. Many people are unaware of what they’re getting themselves into with a payday loan. In a recent survey, 57 per cent of respondents were unable to identify whether or not payday loans cost more than an outstanding balance or cash advance on a credit card.

The truth is it’s difficult to understand the actual calculation of the interest on payday loans. Most people see $15 for every $100 borrowed and think the interest rate is 15 per cent, which seems reasonable compared to the interest rate on their credit card or other credit products. But what most don’t realize is that the annual percentage rate or APR—which is the interest rate on your credit card and other credit products—for payday loans actually works out to be more like 390 per cent! This is because payday loans charge interest bi-weekly rather than annually. So to truly compare apples to apples, you'll need to calculate the APR of your payday loan. That means multiplying 15 per cent, or whatever they charge you bi-weekly for every $100 borrowed, by 26 (52 weeks in a year, divided by 2). 

And unfortunately, it gets worse.

The Ugly: Payday Loans Can Ruin Your Credit Rating and Credit Score

Over 60 per cent of respondents from the payday loans study mentioned they didn’t have access to a credit card, which likely led them to turn to more payday loans.

Failing to pay back these loans can not only further tarnish your credit, but it can also lead you into a never ending game of catch-up, where interest will make it nearly impossible to pay off your payday loan without outside help. It’s a scary situation to fall into, and one that doesn’t warrant much control on your part because of how quickly the interest mounts.

The Cost of Payday Loans Outweigh Their Benefits

More often than not, the long-term financial costs of payday loans outweigh their short-term benefits, with the average insolvent payday loan borrower owing 121 per cent of their monthly take-home income to payday lenders. (Ouch!) We have helped clients who were on the brink of bankruptcy, and it all started with just one payday loan. As an agency that helps over 70,000 people dealing with debt every year, we’ve found that payday borrowing is a symptom of much deeper financial problems.

Avoid Payday Loans with Emergency Savings

You can avoid many of the debt problems brought on from payday loans by setting up an emergency savings fund. By saving even just $10 a week, you can accumulate enough to help you out of a bind when you run into car trouble, unexpected home issues, or vet bills.

Alternatives to Payday Loans and Payday Loan Relief

Unless you are in an emergency situation that requires you to respond with fast cash immediately, take the time to search for other, less extreme options, and look for different ways to pay off payday loans. If you’re having issues paying off your debt or payday loans, consider speaking to a certified credit counsellor. Credit Canada is a non-profit credit counselling agency, which means it costs nothing to speak to one of our certified Credit Counsellors. We’re experts and we’d love to help. Feel free to contact us or call 1.800.267.2272 to get a free, no obligation credit counselling session with an expert who can help you figure out your best options.Our Certified Credit Counsellors Offer Free, Non-Judgmental and Confidential Advice


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