Payday Loans
From : Financial Consumer Agency of Canada
- What is a payday loan
- What options to consider before getting a payday loan
- Where to get a payday loan
- How much a payday loan costs
- What to expect when you take out a payday loan
- What happens if you can’t pay back a payday loan on time
- What you can do if you’re stuck in a debt cycle
What is a payday loan
A payday loan is a type of loan that comes with high fees, making it an expensive way to borrow money. It is often referred to as a high-cost loan or high-cost credit. This loan allows you to borrow up to $1,500 and gives you a maximum of 62 days to repay.
What sets payday loans apart from traditional loans is the short-term nature of the loan, typically lasting only a few weeks. Unlike other loans, you may be eligible for a payday loan without a credit check. Additionally, instead of paying interest, you are charged a flat fee when you repay the loan on time.
Payday lenders also work around your payday schedule, structuring your payments accordingly. You must pay back the loan in full or in part when you receive your next paycheck. However, if you fail to pay on time, you will incur additional fees and interest charges, increasing your debt.
What options to consider before getting a payday loan
To avoid financial difficulties, it’s crucial to make sure you can repay a payday loan on time while still being able to cover your regular expenses.
If you’re facing a financial emergency, there are various alternatives to payday loans that you can consider. These include:
- Requesting more time to pay your bills: You can reach out to your creditors and ask for an extension on the due date of your bills.
- Cashing in vacation days: If your employer allows, you can cash in your vacation days to obtain additional funds.
- Asking for a pay advance from your employer: You can inquire with your employer about getting a pay advance to help you meet your financial needs.
- Borrowing money from family or friends: Consider borrowing money from your loved ones.
Furthermore, there are alternative options that are less expensive than payday loans, such as:
- Obtaining a loan or line of credit from your financial institution: Many financial institutions offer loans or lines of credit at lower interest rates than payday loans.
- Getting a cash advance on your credit card: If you have a credit card, you may get a cash advance at a lower interest rate than a payday loan.
- Utilizing overdraft protection on your chequing account: You can use overdraft protection on your account, but it’s important to note that this may come with fees.
- Requesting payment deferrals from your lenders: You can inquire about payment deferrals, such as a mortgage deferral or a payment holiday on your credit card.
Get tips on what to do if you’re facing a financial emergency.
Where to get a payday loan
Payday loans are offered by privately owned companies both in stores and online, and they must abide by the rules set by the province or territory where they operate.
Each province has its regulations regarding payday loans, while the territories don’t have specific rules. To learn more about the rules governing payday lending in your area, it’s best to contact your provincial or territorial consumer affairs office.
It’s important to ensure that you are dealing with a licensed payday lender, who must have a license to provide payday loans in your province or territory. You can use tools provided by your province or territory to verify whether a payday lender holds a license.
Select your province in the Consumer Hub to find tools and resources on payday loans.
However, it’s crucial to be cautious of online payday lenders outside Canada. Resolving the problem may be challenging if you have any issues with them, resolving the problem may be challenging.
How much a payday loan costs
Payday loans are known for being an expensive way to borrow money compared to other options. This is because they come with high fees and penalties, such as charges for bounced cheques or pre-authorized debits, as well as interest if the loan isn’t repaid on time. These additional costs can make it difficult to repay the loan and may contribute to financial difficulties and stress.
It is essential to consider the repayment of a payday loan carefully before taking one out. If you can’t repay it on time, you may find yourself in a worse financial situation. The debt will keep growing, and you’ll pay more money in the long run. Therefore, assessing your ability to repay the loan is crucial before taking it out.
Fees and penalties
Many provinces regulate payday lending fees and penalties.
| Province | Maximum cost of borrowing for a $100 payday loan | Cooling off period to cancel the payday loan | Maximum penalty for a returned cheque or pre-authorized debit |
|---|---|---|---|
| Alberta | $15 | 2 business days | $25 |
| British Columbia | $15 | 2 business days | $20 |
| Manitoba | $17 | 48 hours, excluding Sundays and holidays | $20 |
| New Brunswick | $15 | 48 hours, excluding Sundays and holidays | $20 |
| Newfoundland and Labrador | $14 | 2 business days | $20 |
| Nova Scotia | $17 | Next business day (2 days for online payday loans) | $40 (default penalty) |
| Ontario | $15 | 2 business days | $25 |
| Prince Edward Island | $15 | 2 business days | n/a |
| Saskatchewan | $17 | Next business day | $25 |
What to expect when you take out a payday loan
If you are considering taking out a payday loan, there are several things you should keep in mind. First and foremost, payday loans are a type of short-term loan that typically come with high-interest rates and fees. These loans are designed to help you bridge the gap between paychecks when unexpected expenses arise, but they can also be risky and lead to a cycle of debt.
To apply for a payday loan.
You must provide proof that you have a regular income, bank account, and
permanent address. Some lenders may require you to have a credit score or meet other criteria.
Once you have provided the necessary information, the lender may require you to do one of two things:
- Fill out a form that authorizes the lender to withdraw payment amounts (including fees) directly from your bank account on the due date (this is called a pre-authorized debit), or provide a post-dated check for the total loan amount (including fees).
- It’s important to understand that payday loans often come with high-interest rates and fees, making them very expensive.
- Additionally, if you cannot repay the loan on time, the lender may charge additional fees or interest and could even take legal action against you. Therefore, it’s essential to carefully read and understand the loan terms and conditions before applying.
- A payday loan may not be the best solution if you are struggling with debt or financial difficulties. Instead, consider reaching out to a credit counselling agency or financial advisor for assistance in managing your finances and finding alternative funding sources.
Learn more about pre-authorized debits.
Getting money from a payday lender
When you borrow from a payday lender, the funds will be transferred to your bank account or given to you in the form of cash. Alternatively, the lender may provide you with a prepaid card, which can be used to access the funds. However, be aware that additional fees may be associated with activating and using the card.
Paying back a payday loan
Certain payday lenders may require you to repay your loan in person at the same location where you originally obtained it. Additionally, payday lenders are prohibited from extending or rolling over your loan in many provinces. Furthermore, these lenders are not allowed to ask you to sign a document that would authorize them to receive payment from your wages directly.
Making sure you understand the agreement
When obtaining a payday loan, you will be asked to sign an agreement, which must comply with the regulations set forth by your province.
- The agreement should detail important information such as the amount borrowed,
- associated fees,
- payment schedule,
- and the loan due date.
You must read the agreement thoroughly before signing it, and don’t hesitate to ask the lender any questions about any unclear or confusing terms.
What happens if you can’t pay back a payday loan on time
Failing to make payments on your payday loan can result in serious consequences, which vary depending on the laws in your province. These consequences may include fees charged by both the lender and your financial institution for insufficient funds, the accrual of interest on the outstanding amount, and an increase in the total amount owed. If you continue to miss payments, the lender may involve a collection agency, which may negatively impact your credit report. Additionally, legal action may be taken against you for the debt.
Provincial laws outline what actions a payday lender can take when attempting to collect a loan, including how frequently they can contact you and the methods they can use to encourage repayment. You should contact your provincial or territorial consumer affairs office for more information on debt collection.
It’s essential to make timely payments on your payday loan to avoid falling into a debt trap.
What you can do if you’re stuck in a debt cycle
Before deciding to take out a payday loan, it’s important to consider the potential long-term consequences, such as difficulty in making ends meet and the potential for falling into a cycle of debt.
If you’re struggling to make ends meet or find yourself in a difficult financial situation, it’s recommended that you seek advice from reputable sources. Some qualified professionals can help you explore various financing options and find the best solution for your needs. This advice is confidential, non-judgmental, and often free.
Some of the financial options that you may consider include:
- a financial advisor
- an accredited credit counsellor
- a licensed insolvency trustee or an insolvency lawyer