Payday Loans: What You Need to Know Before You Borrow
by Scott Hannah
Q: I’m embarrassed to admit that I’ve been struggling to pay off $500 that I borrowed from an online payday loan store four months ago. At the time I really appreciated the loan because I was short of money to cover my rent cheque. I thought I would be able to cut back on my expenses and pay back the loan on my next paycheque, but after I paid back the loan I kept running short of money. I always ended up taking out another loan to cover my expenses. I don’t qualify for a bank loan or credit card because I have some bad credit problems from the past. My bank told me that it will be at least a year before they will approve me for a credit card. I can’t wait that long; any suggestions? ~Reggie
A: Unfortunately your situation is a common one. Over the years, we have had thousands of consumers contact the Credit Counselling Society for help due to problems repaying payday loans. On the surface, borrowing a few hundred dollars to address a cash shortfall or an unexpected expense can seem like a good solution, especially if you don’t have access to conventional credit like a credit card, line of credit or an overdraft. To be fair to the payday lenders they are required by law to make borrowers aware of their terms and costs in advance of extending a loan. However, when a person is facing a cash crunch, they focus on solving the issue they are dealing with and not on the costs and challenges of taking out and repaying a payday loan.
Costs Associated with a Payday Loan
The majority of the provinces in Canada have legislation outlining the maximum charges a payday lender can charge. The rates are typically based on a maximum charge for every $100 borrowed and vary from $22 to $15 on short-term/payday loans.
Paying $75 for a $500 loan may seem like a good option when you are faced with a financial emergency, but the reality is that the annualized interest rate on a loan with charges of $15 for every $100 borrowed is almost 400 per cent! So do payday loans work? On a short term or one-time basis this may be a viable option for some people, but on a longer term basis this is a very expensive form of credit.
Alternatives to Costly Loans for People with Bad Credit
Beware of the Payday Loan Cycle
A payday loan cycle may go on for months until a person is finally in a position to clear the loan; unfortunately, they will have paid hundreds of dollars in charges in the process. Think of it this way: if you are running short of funds during a pay period or don’t have the savings on hand to deal with a cash crunch, are you really going to be able to repay your payday loan in full, along with the borrowing charges, without running short of funds again?
The answer to this question for a lot of people is ‘no’ and they find themselves getting caught in a cycle. They pay off their current payday loan and then have to take out another loan to cover their spending shortfall until they get their next paycheque two weeks later.
One Payday Loan May Lead to Another
If you’re not managing your income and expenses with a budget and find it necessary to use payday loans to address spending shortfalls, the charges associated with payday loans can eat up a sizable portion of your paycheque over time. This can lead to taking out another payday loan on top of an existing payday loan to make ends meet in the short term. While there are laws that prevent a payday lender from providing a customer with more than one payday loan at a time, there is nothing stopping a consumer from going to another payday lender for a loan.
Unfortunately, there isn’t a centralized database where payday lenders would be required to check that a potential customer does not have an existing payday loan before advancing them a new loan. Most payday loans don’t show on a credit report. When consumers are managing multiple payday loans they may find that their situation goes from bad to worse in a very short period of time.
Get Help to Solve Payday Loan and Debt Troubles for Good
If you’re having trouble repaying a payday loan or are caught up in a payday loan cycle, contact the lender to get payday loan help and make arrangements to extend the repayment of the loan. Many provinces require payday lenders to offer extended repayment terms without penalty to the consumer. If you are not sure what the laws are for your province contact your provincial consumer protection department for assistance. It may also be helpful to contact an agency like the Credit Counselling Society where you can review your overall financial situation, map out a plan to pay down your debt and create a budget to help you regain control of your finances for good.
The Bottom Line on Payday Loans
Before taking out a payday loan or any form of credit, stop and ask yourself why you find it necessary to borrow the funds. Is it for an unforeseen expense that has just come up at a bad time financially, or is it because of a deeper problem? Often times, a payday loan, a credit card cash advance or using other forms of credit is just a symptom of the real problem. If you don’t address and solve the real problems that are causing you to rely on credit, you may find yourself in a never-ending cycle of getting in and out of debt. Rip the bandage off and address your situation. If you’re not sure where to start, get help from a reliable source at little or no cost. It may sting a bit at first, but once the bandage is off and you address your situation, you will feel better and will be on the road to financial well-being.
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- How to Re-Establish or Fix Your Credit for Free