In Canada, instant loans (aka payday loans) are everywhere, you can find locations on just as many street corners as you will find a Tim Hortons! They promote ‘fast cash’ and ‘instant loans’ as easy ways to fix your problems. They use shady tactics to make you think they are an affordable short-term loan option to help get you out of a jam. In truth, they are far from affordable and hard to get away from.
Let’s explore everything you need to know about payday loans, including how to avoid and escape them!
Understanding payday loan facts
Payday loans are small loans designed to cover emergencies until your next paycheque. They typically have a simple loan application process. Instant loans are marketed to people with bad credit, no credit history, and no access to other lending products. The convenience of their instant funding comes at a staggering cost. They will often show you the cost to borrow with these instant loans over 14 days, and when we crunch the numbers, they are alarming!
Let’s convert a payday loan example into a more widely used lending cost term – APR (Annual Percentage Rate). This is the overall lending cost shown in a % charged on installment loans, lines of credit and other lending products over a year. Credit card interest rates vary but usually fall around 12-29%. When we convert payday loan rates to APR, these payday lending fees translate into APRs of over 300%! They make credit card APRs seem like a steal! Compared to interest rates on credit lines, which have been trending down with the reduction in the Bank of Canada interest rate, they feel like robbery!
I hit up the website of a popular payday loan company, and after just a few clicks, I saw that the interest rate to borrow $500 is 365%!!! Here’s another eye-opening piece of information! It compared borrowing $300 over 14 days with a credit card vs a payday loan.
- Payday loan cost = $42
- Credit card cash advance cost at 21% APR = $7.65
Sneaky tactics payday lenders use to keep you hooked
Payday lenders have mastered the art of creating customers for life using shady tactics. Here’s how they do it:
High fees and finance charges
The finance charges on payday loans are astronomical, as seen in my example above. Borrow $500 and pay back $570 the next payday. This often leads you to borrow again until your next payday. That’s a cost of $5 a day!
Pre-authorized debit agreements
Most payday loan agreements require access to withdraw payment from your bank account via pre-authorized debit. This means lenders can withdraw funds automatically from your bank account. This often leaves you with insufficient funds for other expenses, leading to overdrafts or NSF fees. Along with this, often, agreement terms make it very difficult to get out of the contract.
No credit check? Not so fast
Many payday lenders claim to skip credit checks, so you believe they won’t impact your credit score or report. However, they may still report missed payments to credit bureaus, negatively impacting them.
Targeting vulnerable consumers
Payday lenders often advertise instant payday loans and cash advances to individuals with bad credit. They exploit people with no savings who are in difficult financial situations. Leaning into how easily individuals can access instant loans in their ads makes it tempting when you feel like you don’t have any other options.
Trying to collect on loans that are part of a bankruptcy or consumer proposal
Payday lenders often ignore these legally binding agreements and try to collect on these loans anyway. If this happens to you, contact your bankruptcy trustee to let them know.
Offering to ‘help’ by deferring payments
Need a pause on payments? Your payday lender can help, but they don’t pause the interest, increasing your debt. This often creates more challenges for you!
How to avoid the payday loan trap
Build an emergency fund
Even saving $500 for unexpected expenses can help you avoid turning to payday lenders.
Get creative
How can you bring in more money now? Are there items you can sell? Do you have a skill you can use to create income? Can you walk your neighbour’s dog? Put all your ideas on the table.
Family loans
Mixing friends/family and money can be tricky, but if you have anyone who can help, reach out to them. Set clear repayment terms, and do everything you can to stick to them. If you have any repayment challenges, openly communicate with them so they know what to expect.
Contact your current lenders
If other debt payments are leading you to consider payday loans, reach out to them. See what options you have to defer payments or potentially even reduce interest rates.
Explore other lending/payment options
Explore alternatives like overdraft protection, personal loans, or credit cards to avoid falling into the payday loan trap. If you are considering a payday loan to cover a larger necessary expense, is there an option to use a payment plan or buy now, pay later option to repay? BNPL has its risks, but payday loans are riskier!
Use a credit card or line of credit
Even if your credit card charges a high annual interest rate, it’s still far cheaper than a payday loan.
Ask for help
Many community organizations offer free assistance if you are facing financial hardship. Often, hopping online and looking for resources in your area will guide you to many different options.
Understand your big financial picture
Take a step back and look at your monthly income and expenses to see exactly where you stand. This can feel overwhelming, but often, the clarity you will get from this step will help reduce your financial stress.
How to escape the payday loan cycle
If you’re already stuck in the payday loan cycle, here are steps to break free:
- Understand your rights – Every province/territory has different payday loan laws that offer consumer protection. Understanding the laws can help you identify if your lender is following them. Carefully review your loan agreement to understand the terms and total costs. For example, lenders in Ontario cannot charge more than $15 per $100 borrowed and must provide clear loan agreements.
- Consolidate your debt – A debt consolidation loan can combine multiple payday loans into a single payment with a lower interest rate.
- Negotiate with your lender – Some instant loan lenders offer repayment plans for borrowers who can’t pay on time. Be cautious, though—read the fine print to ensure you’re not agreeing to more hidden fees.
- Get financial counselling – Financial counselling can help you get your finances back under control and explore options for your debts.
- Stop the cycle – Do everything you can to avoid taking out new payday loans to cover old ones. This is easier said than done, but look for options to help you increase your income and decrease your expenses to help you make the leap.
Stories of payday loan horror
A quick search online reveals countless Canadian borrowers sharing stories of how instant loans turned into financial nightmares. These stories highlight the importance of understanding loan interest rates and the risks of relying on payday loans. If you are trying to get out of your own instant loan nightmare, we can help. Contact one of our trained Credit Counsellors for a free consultation to find out how.
