A recent report from the Financial Consumer Agency of Canada found that almost 2 million Canadians use payday loans every year. While payday loans offer a quick and convenient way to get a loan when your cash flow stops flowing, the risk of an ugly repayment cycle and sky-high APR loom overhead.

Many payday lenders say that it’s risk-free, that they’re transparent about the process, etc. But the truth is, no amount of transparency can negate APR of 500%...or more.

How Do Payday Loans Work?

A payday loan is a very short-term personal loan agreement that is contingent on your payroll timeline and income level. Since most people are paid bi-weekly, the payday loan industry built its general repayment rules around getting a loan for 14 days or less. That said, if someone is paid monthly or weekly, the payday lender would adjust the repayment timeline based on it.

Payday loans, by their very nature, are high risk to lenders. To offset this risk, payday loans come at a high cost to the borrower in the form of fees and astronomically high annual percentage rate (APR).

Can You Get a Payday Loan Online?

Yes. In fact, online payday loans in Canada have been on the rise in the last decade. With more and more Canadians becoming “unbanked”, the payday loan industry saw an opportunity and latched on.

Provincial governments have been tightening the reins on how many of these financial institutions can exist within a certain radius or in low-income areas, but they have not yet caught up to regulating the online world of payday lenders. And with so many lenders popping up all the time, it’s hard to know who’s trustworthy and who’s not.

How Payday Loans Work in Canada

It’s important to note that payday loans are outright banned in some provinces (eg: Quebec). The Canadian provinces that do allow short term payday loan companies to operate only do so with strict legislation.

Over the last 7 years, some provinces, like Ontario, have tightened their already strict rules. For example, the total cost of borrowing $100 in 2012 in Ontario was $21. In 2019, it’s $15.

The Government of Ontario lowered the fees to help prevent a “cycle of debt”, but to little improvement.

How do you get approved for a payday loan?

Application requirements vary from province-to-province and lender-to-lender, but generally, a company requires an applicant to:

  • Be a Canadian citizen or permanent resident
  • Be at least 18 years of age
  • Have regular income
  • A permanent address (no P.O boxes)
  • Have a bank account
  • Be able and willing to provide pay stubs
  • Be willing to concede to a credit check (soft or hard).

If an application is approved, the lender releases the funds either in cash (at a brick & mortar location ) or e-transfers it directly to a bank account. On the date of repayment, the borrower is required to repay the full principal amount plus the fees associated with the cost of borrowing.

How much do payday loans cost?

In Canada, the cost of borrowing is broken down by a flat fee per hundred dollars borrowed. This flat fee varies from province-to-province, as well. Note that in some provinces, payday loans are banned. See our chart below for fee details, annual percentage rates, and penalty information.

Province

Max. cost of borrowing $100 (14 days)

Annual Percentage Rate (APR)

Max. penalty for a pre-authorized debit or returned cheque

Alberta

$15

391.07%

$25

British Columbia

$15

391.07%

$20

Manitoba

$17

443.21%

$20

New Brunswick

$15

391.07%

$40

Nova Scotia

$25

651.78%

$40

Ontario

$15

391.07%

N/A

Prince Edward Island

$25

651.78%

N/A

Saskatchewan

$17

443.21%

$25

 

What Are the Downsides of a Payday Loan?

The cycle of debt risk is what payday loans are most notorious for. Some lenders are careless with how much they lend out, putting a lot of pressure on the borrower. After all, it’s very tempting to accept more money than you need. All of sudden, you can cover your bills AND afford that luxury item you’ve had your eye on!

For example, a borrower in Saskatchewan applies for a loan of $700, but due to their spending habits and income should probably not be approved for that much. However, the lender gives them the $700. The borrower, upon repayment time, can’t afford the additional fees of $119 ($17 per hundred borrowed). Now, their budget is affected further, and they have to borrow again for another pay period, just to try and cover the loss that paying the fees from the first loan caused. The cycle continues and the debt worsens...

How do payday loan borrowing costs compare against other options?

Based on a $300 loan for 14 days, this diagram emphasizes the high cost a payday loan compared to a credit card cash advance, overdraft protection on a bank account, and borrowing from a line of credit.

Chart comparing borrowing costs of payday loans compared with other common emergency loan sources.

Original Photo Credit: Financial Consumer Agency of Canada-- Interest rate comparison on a $300 loan for 14 days.

What Happens If You Can’t Pay Back a Payday Loan?

All lenders charge late fees and additional interest on unpaid loans. Additionally, if a borrower utilized an online payday loan company and hooked up their deposit and repayment into a bank account, they could get hit with non-sufficient funds (NSF) fees from their bank when the lender inevitably tries to collect their money. Now, the borrower not only owes the original loan amount plus fees but also late fees, insurmountable interest, and possibly bank fees to boot.

If due dates continue to be missed and the loan goes into default, payday lenders will most likely use all collections practices at their disposal to retrieve their money. Once the in-house collections agents are done with the account, the loan will usually be given to a third-party collections company, and the borrower’s credit will take a very bad hit.

Here’s How You Can Avoid Taking out a Payday Loan

Payday loans are high cost and the most expensive way you can borrow money. According to the Government of Canada, borrowers aren’t running after money because they want something they don’t need. They usually are trying to cover an unexpected expense, avoid late charges on regular bills, car payments, or other necessities. Alternatives to taking out a payday loan include:

  • Consider taking out a cash advance on a credit card. Ask for a temporary increase. It’s still much less expensive than a payday loan, and you’ll have the entire grace period to repay it.
  • Utilize overdraft protection if available. Like with a cash advance on a credit card, it’s still much cheaper than a payday loan.
  • According to the same noted survey, 45% of Canadians with savings over $1500 opted to not touch it in the event of a cash-flow shortage and opted to use a payday loan instead. If you have savings, use it! It’s still cheaper because it’s your money.
  • Apply for a different kind of personal loan. (ie: an installment loan)

If these aren’t options for you, then consider some additional money management options. So many Canadians think they can’t build a savings account, but it is possible. Even just $5 a week put away can add up over the year, and cover unexpected costs or pay off debt. Lastly, not having a budget can sometimes mean chaos for your wallet, so creating a financially-sound plan like the 50-20-30 budget would be a great place to start!

What Are the Alternatives to a Payday Loan?

The truth is that almost half of the Canadian population (47% of whom live paycheque to paycheque) have cash flow problems from time-to-time, whether it’s from illness and not being able to work for a while, an unexpected repair or some other reason.

Not everyone has stellar credit, access to an empty credit card or has family/friends to loan them money. And, this is exactly why predatory payday loan companies exist - to pounce on those opportunities.

The good news is that there are cheaper, smarter alternatives to payday loans.

An installment loan is a better option, with a longer repayment period, significantly lower interest and a solid repayment schedule. In addition, most installment loan companies can work with creditors to help improve your credit score, as long as you make your payments on time!

Fresh Start Finance encourages responsible borrowing. We’re not just another lender, we’re a team of expert financial advisors set up to help you restore your financial standing. We offer a safe alternative to payday loans with fast cash advances delivered to your bank account in less than 72 hours.

Our interest rates are far more reasonable than payday lenders, and we can assist you even if you have bad credit.

Apply with us today and say goodbye to the cycle of debt.

 

Header Photo Credit: Karen Roach / Adobe Stock