Will a Payday Loan Fix My Money Troubles?
Key questions to ask yourself and alternatives to getting a payday loan
By Kelly Gabriel
The last few years have been financially turbulent for many of us; and unsurprisingly, as the overall cost of living has skyrocketed, so too has our reliance on payday loans. For an individual who has been struggling with debts and other financial obligations, a payday loan can look like the perfect solution. It’s quick, easy, and not that expensive, or is it?
If you’re already overwhelmed with debt and you run into a sudden expense – an unexpected car repair, a leaky roof, or a medical emergency — checking loan disclosure details for your overall cost of borrowing might not be high on your list of priorities. But, jumping into a payday loan without reading the fine print and understanding all your options, could cost you significantly more than you borrowed in the first place. So here are some tips to keep in mind, and key questions to ask yourself before applying for a payday loan.
How to Escape a Payday Loan Nightmare
Can I Afford the Payments on a Payday Loan?
Keeping your current financial situation in mind, consider carefully if you can truly live without a significant part of your next pay cheque. Will you be able to manage the repayment of the payday loan in the short term of the loan, without compromising your ability to pay for your other essential expenses? Being unable to pay the loan back on time will lead to additional costs and a worsening of your financial situation.
An Instant Online Payday Loan Won’t Solve Your Money Problem
What is the Actual Cost of the Payday Loan Going to Be?
Fully understanding the terms and conditions and overall cost of borrowing for a payday loan is crucial. In Canada, about 2.5 million people a year use payday loans and many of them are unprepared for the high interest rates and hidden fees. It turns the payday loan they took out as a debt relief solution into another obligations that exacerbates their debt problem.
According to the Financial Consumer Agency of Canada (FCAC), a payday loan costs $17 per $100 that you borrow, which is the same as an annual interest rate of 442%. That means if you borrow $500 for 2 weeks, at least $585 will be deducted from your next pay cheque to pay it back. Compare that to:
• overdraft protection on a bank account which often includes a $5 fee plus 21% annual interest on the amount you borrow
• an unsecured line of credit which can include an administration fee plus an annual interest rate of at least 8% on the amount you borrow
• a cash advance on a credit card sometimes includes a fee plus an annual interest rate of 23% or more on the amount you borrow
Payday loans have short repayment terms and high interest rates. The annual percentage rate (APR) can exceed 400%, making it one of the most expensive borrowing options in Canada. Ensure you understand the repayment schedule, fees, and the total cost of the loan before committing to it.
Do I Need to Solve a Short or Long-Term Financial Problem?
If your money problem is a situational or short-term financial problem, a payday loan might be a quick fix. However, most financial problems are rooted in ongoing issues. For instance, maybe you’re considering a payday loan to pay for a car repair bill because your credit card is maxed out and you don’t have an emergency fund. A more sustainable solution for the future includes budgeting, financial counselling, and a plan to manage debt. We can show you how to create a more stable financial future for yourself and your family so that you don’t need to rely on credit cards to make ends meet and can save up money to pay for unexpected expenses.
Why Easy Online Cash or Payday Loans Don’t Exist
What Are the Consequences of Not Repaying the Payday Loan?
The potential consequences of not repaying your payday loan are significant. If you cannot repay the loan on time, additional fees, increased debt, and potential legal action can trap you in a cycle of debt that is challenging to break. Depending on the laws in your province, the consequences can include:
- the payday lender charging you a fee if you don’t have enough funds to cover the payment(s)
- your bank also charging you an insufficient funds fee (NSF) if you don’t have enough money in your account
- the payday lender charging you interest on the outstanding amount
- the total amount that you owe, including the fees, will roll over into a new loan
- the payday lender may report your debt to a collection agency and your arrears may appear on your credit report
- the payday lender or collection agency may sue you for the debt
How Will a Payday Loan Affect my Credit Score?
Many payday loan lenders are members of Canada’s credit bureaus and will report you loan and repayment history to them. This means that your payday loans will appear on your credit history report and factor into your credit score. While not all payday loans will be reported to the credit bureaus, if you fail to repay the loan on time and a collection agency takes over the debt, it will typically be reported and can lead to consequences that will negatively affect your credit score. Make sure you’re aware of how borrowing and repaying the loan could impact your credit rating.
What Other Debt Solutions Should I Consider First?
Many people who apply for a payday loan think that it’s their only option to get cash fast. However, before taking out a high interest payday loan, make sure you’ve explored all of your debt solution options first. Alternatives to payday loans include personal or debt consolidation loans from a lender at your bank or credit union, borrowing from family or friends, taking on extra shifts at work or asking your employer for a pay advance, or accessing emergency assistance programs. While none of these options might be ideal, they often have lower interest rates and better terms compared to a payday loan.
Do I Have Other Options Besides a Payday Loan?
Before taking out a payday loan, consider speaking with a reliable, professional organization to help you look at all of your options, and potentially help you make a plan to get out of debt. For many people, a payday loan is a knee-jerk reaction to an unexpected expense or debt. An objective, professional can help you find solutions you might not have considered before.
Are You Caught in a Payday Loan or Debt Cycle? We Can Help.
Being caught in a pay day loan or debt cycle can feel overwhelming and isolating. You don’t have to struggle alone. Our friendly, accredited, financial counsellors can show you all of your options and potential solutions – suited to your specific financial situation. Reach out to us for a free, no obligation appointment.
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