Payday Loan

Payday Loans

Payday loans (also known as cash advances) should be a “last resort”, as they are generally not recommended under any circumstances except when absolutely necessary and no other alternatives are available. Payday loans are often linked to usury – defined as a loan with high or excessive interest. Over the last few years, many jurisdictions across North America have implemented limits and restrictions on payday loans, given their exorbitant interest rates. This practice resulted in loan recipients getting trapped in a “payday loan cycle” where borrowers can only afford the interest and fee payments due to the high interest rates, but cannot pay down the principal loan balance. This leads to a “payday loan rollover” where the borrower pays a fee to extend the due date of the loan. Note that even this fee cannot be used to pay down the principal. It is simply a charge for the ability to pay the original principal amount at a later date.

Obtaining a payday loan or cash advance is extremely simple, and it is deliberately designed as such. There are loan shops in nearly every city and town throughout Canada, and many lenders now allow you to take out a loan online. All you need to take out a cash advance is valid identification, bank account information, and proof of income from your employer (usually in the form of the pay stub from your last paycheck). You do not need good credit to get a payday loan because the lender secures their fees, interest, and principal loan amount repayment with your next paycheck. With many lenders offering “no credit check” loans, you can get these short-term loans with less-than-perfect or even bad credit. The below diagram shows the distribution of payday loan borrowers by the level of household income.

Income Levels of Payday Loan Borrowers in Canada

Loan amounts vary among lenders, ranging from $50 to over $1000. Loan interest rates are generally 15% for a two-week period, which means that the Annual Percentage Rate (APR) for a $100 loan would be 400%. By any metric, this is an excessive APR. Most loans have fees and additional interest charges that are triggered in the event of late payment and/or non-payment. As such, it is common for these loans to balloon and spiral out of control quickly. In Canada, payday loans are regulated at a Provincial level, and each province has its own limits on the APR that can be charged.

Annual Percentage Rate Chart of Canadian Provinces

There are very few positive attributes to a payday loan or cash advance. If you’re facing a true emergency, such as a medical issue, and you know you will not “fall short” on your next paycheck even with the loan repayment factored in, this may be a one-time option that helps you meet your immediate cash shortfall. However, it is important to evaluate your options before taking out a loan.

  • You may be able to work with your creditor to determine a payment plan.
  • You might be able to put the needed transaction on an existing credit card.
  • If it’s possible, you could obtain a pay advance from your company.
  • If approved, you could tap into your bank’s overdraft protection.
  • It may even be as simple as asking a relative or friend to help you “bridge the (cash) gap” until your next paycheck.

However, to avoid the headache of a cash gap in the first place, the financially sound thing to do is to start putting aside a small percentage of your monthly earnings into an emergency fund. If you get into a situation where you need immediate cash, you’ll be able to pull from this fund to cover any emergencies.

As mentioned above, Canadian provinces stipulate their own regulations regarding payday loans. The only commonality between all provinces is that the maximum borrowing amount is $1500. As such, it is important to know your particular province’s regulations before obtaining a payday loan to ensure you are aware of the various protective measures available to you and that the lender you work with is adhering to provincial laws. In most provinces, lenders are barred from accessing the borrower’s bank account or wages to recoup their money.

Prior to taking out a payday loan or cash advance, it is highly recommended that you step back and thoroughly assess your financial situation. Ask yourself questions, such as:

man thinking
  • Is this really an emergency that warrants a cash advance?
  • If not, can I wait until my next paycheck to cover the expense?
  • If so, do I have the ability to pay back the loan in full plus fees and interest rates when I receive my next check?

This self-assessment will give you the situational awareness to make a sound decision and avoid potentially becoming trapped in an unsavoury loan relationship.

If and when you decide to obtain a payday loan, there are a few questions that you should ask your lender to ensure you have all the information you need regarding rates, loan terms, and additional fees or penalties and when they are triggered.

  • How much will this loan cost me per $100? This will help you understand the charges (principal plus interest) that you will have to make at each payment.
  • What happens if I am unable to pay back the loan on time? In the event that a payment has to be missed, what are the consequences? While there will presumably be a fee involved, some provinces have a maximum cap on what can be charged, so ensure that you have confirmed this in case you live in a province with no cap.
  • Can I cancel or repay the loan early? Some lenders allow a certain time period to cancel the loan in case the borrower decides it is not the best option for them. It is worth finding out if the lender you are working with allows for this. Notwithstanding the above questions, you should always read the loan agreement in full prior to signing on the dotted line. Ask questions to clarify any and all items you don’t understand. A small oversight today can snowball into a costly mistake tomorrow! Another good practice is to read online reviews of other borrowers who have worked with the lender. There are often some good tips and/or words of caution in these reviews that you can use to your advantage when obtaining the loan.

credit tips!

Financial responsibility and maturity are key to avoid instances where you’d need to take out a payday loan, cash advance, or title loan (a short-term loan that uses your car or truck as physical collateral for the debt). No matter what you earn, putting aside 5% of your monthly income as an emergency fund will likely give you the ability to cover most emergencies after saving for 12 months. As a consumer, the onus is partly on you to avoid situations where you’d need to potentially compromise your financial stability or well-being. It is important that we all think ahead and create contingency plans for the proverbial “worst-case scenario”.”

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