What are payday loans?

A payday loan is a small, short-term loan that typically ranges from $100 to $1,500. The loan is usually due on your next payday, and the lender charges a fee for borrowing the money. While payday loans are legal in Canada, they are often seen as a last resort due to their high-interest rates and fees.

Are payday loans legal in Canada?

Yes, payday loans are legal in Canada, but they are heavily regulated. Each province and territory has its own set of rules to protect consumers from predatory lending practices. For example:

• In Ontario, payday loan providers must be licensed, and they are limited to charging no more than $15 for every $100 borrowed.
• In British Columbia, payday lenders are restricted to charging a maximum fee of $17 for every $100 borrowed.
• In Quebec, strict consumer protection laws cap annual interest rates at 35%, effectively banning typical payday loans.

These provincial regulations are designed to curb excessively high fees and prevent borrowers from falling into a cycle of debt.

How do payday loans work?

Typically, payday loans are intended to cover emergencies or short-term financial needs. Borrowers apply for a payday loan either online or in-store, and upon approval, they receive the funds in cash or through a direct deposit. In exchange, the borrower agrees to repay the loan, plus fees, on their next payday – usually within two weeks. Because payday loans are unsecured, lenders typically do not require a credit check, making them accessible to individuals with poor credit scores. This convenience, however, comes with a steep price, as payday lenders often charge high fees that can translate to annual percentage rates (APRs) of over 400%.

The risks of payday loans

While payday loans are legal, they come with significant risks, including:

1. High-interest rates: the fees associated with payday loans can make them an expensive form of borrowing. For example, if you borrow $300 and are charged a $45 fee, this could equate to an APR, or Annual Percentage Rate, of 391%. This makes payday loans a risky choice for borrowers who cannot repay the loan quickly.
2. Debt cycles: many borrowers struggle to pay off payday loans on time, leading them to roll over the loan or take out additional loans to cover the original debt. This creates a dangerous cycle of borrowing that can spiral out of control.
3. Impact on credit: while payday loans do not typically affect your credit score directly, failing to repay them on time can result in additional fees, collection calls, and even legal action, all of which can harm your credit rating.

Alternatives to payday loans

Before turning to payday loans, it’s worth considering other, safer alternatives for obtaining quick cash:

• Personal loans: some financial institutions offer personal loans with lower interest rates than payday loans.
• Credit union loans: credit unions often provide more flexible and affordable short-term loans.
• Lines of credit: a line of credit from your bank or financial institution may be a more affordable option than a payday loan, especially if you have a good credit score.
• Borrowing from friends or family: if possible, borrowing from someone you trust can help you avoid the high fees associated with payday loans.

When should you use a payday loan?

If you find yourself in a financial emergency and need cash quickly, a payday loan may be an option, but it should be used cautiously. Always review the terms and fees before committing. If you are unable to repay the loan on time, consider alternative options or reach out to the payday lender to discuss payment arrangements.

Are payday loans illegal? FAQs

Here are some of the most commonly asked questions we receive around ‘are payday loans illegal?’:

What happens if you don’t pay back a payday loan in Canada?

If you don’t pay back a payday loan in Canada, the lender can take several actions to recover the debt. First, they will typically charge additional fees for late payments, which can quickly increase the total amount owed. If the debt remains unpaid, the lender may send your account to a collection agency, which can negatively affect your credit score. In some cases, the lender may take legal action to recover the debt, potentially leading to wage garnishment or other court-enforced measures. It’s important to address any payday loan debt as soon as possible to avoid escalating consequences.

Can payday loans take you to court in Canada?

Yes, payday loans can take you to court in Canada if you fail to repay the loan. If you default on a payday loan, the lender may first attempt to collect the debt through phone calls or collection agencies. If the debt remains unpaid, the lender can file a lawsuit to recover the money owed. If the court rules in the lender’s favour, they may be granted a judgment, which could lead to actions such as wage garnishment or a lien on your property. Most payday lenders, however, prefer to avoid legal action, as it can be costly and time-consuming, so it’s often a last resort.

Do payday loans go on a credit report?

Payday loans do not typically appear on your credit report because they are usually not reported to the credit bureaus. If you fail to repay the loan, however, and it goes to collections or if legal action is taken, the default or judgment may be reported to the credit bureaus, which could negatively impact your credit score. While payday loans themselves aren’t generally reflected on your credit report, their consequences – such as missed payments, collections, or court judgments – can have a lasting effect on your creditworthiness.

Payday loans are not illegal in Canada, but they are subject to strict provincial regulations to protect consumers from unscrupulous lending practices. If you find yourself relying on payday loans regularly, it may be a sign that you need to explore more sustainable financial options. Book a free consultation with a Licensed Insolvency Trustee to explore your options, regain control of your finances, and avoid the cycle of payday loan debt.

What to read next

• How do payday loans work?
• What is a payday loan?
• Long term payday loans: the consequences
• Payday loans and bankruptcy: everything you need to know
• Revolving loan: what is it?

What are the consequences of long term payday loans?

Payday loans – often also referred to as cash advances or short term loans – are typically designed to offer quick access to a small amount of cash. The borrower will agree to repay the loan, as well as high interest rates and fees they might incur, by their next payday. While payday loans can be a great short-term solution for situations where you might need emergency funds, this can all change when they become long term payday loans and you begin to get stuck in a cycle. Here are some of the common consequences of payday loans:

High interest rates

One of the most significant consequences of long term payday loans is the accumulation of extremely high interest rates. Payday loans are notorious for their high APRs (Annual Percentage Rates), which often reach triple digits. When payday loans are continued over a period of time, the cumulative interest can exceed the principal debt that was borrowed. This creates a cycle of debt that can become increasingly challenging to break.

The payday loan debt cycle

By relying on long term payday loans, you can quite easily fall into a cycle of debt. This is where the debt obligations of your current payday loans lead you to take out new payday loans in order to repay the first. This never ending cycle can quickly become a loop of borrowing, repayment, and re-borrowing, trapping you into a debt cycle that is difficult to break.

Impact on credit score

Although payday loans are relatively easy to obtain for most individuals and without the need for a stringent credit check, if you fail to repay your loan accordingly, it can have a detrimental impact on your credit score. Long term payday loan debts will be reported to Canada’s primary credit bureaus, which in turn can have a negative impact on credit reports and make it more difficult for borrowers to access more traditional forms of credit moving forward. At Spergel, our expert Licensed Insolvency Trustees can help you to rebuild your credit score.

Stress and mental health impacts

Managing long term payday loan debts can take a toll on borrowers’ mental health, especially given the stress of accumulating interest and relying on new payday loans to repay previous loans. A constant financial strain, plus the pressure of repayment deadlines, can lead to mental health problems including anxiety and depression. If you are beginning to experience any of these effects, reach out to a Licensed Insolvency Trustee at Spergel today. No matter how bad you might feel your financial situation is, we are here to help you on the pathway to financial freedom.

Collection issues and legal action

If you are struggling to make your repayment obligations, long term payday loans can lead to severe consequences. Lenders can employ aggressive collection tactics. These could include harassing collection calls, and threats of legal action like a wage garnishment, placing a lien on your property, or even freezing your bank account. Each of these consequences can create an even more stressful and complex situation for the borrower, on top of a challenging financial situation.

What to do if you are in a long term payday loan cycle

If you are struggling with a long term payday loan cycle, you might be wondering what you need to do to break it. At Spergel, we have helped over 100,000 Canadians gain debt relief, and so our expert Licensed Insolvency Trustees are here to help. Here are the steps we recommend taking to mitigate the consequences of payday loans if you are struggling with long term payday loan debts:

• Communicate with your lenders. By being transparent and proactive with your lenders about your repayment difficulties, they are more likely to be flexible and open to making alternative arrangements with you.
• Explore alternative options. There may be another form of credit that has a lower interest rate, like a personal loan. This could help you to break the cycle of payday loan debt.
• Create a budget. By developing a thorough budget and a financial plan, you can take greater control over your management of expenses, income, and even your ability to save. Knowing exactly what you have in terms of income and outgoings might even prevent you from becoming reliant on payday loans.
• Speak to a Licensed Insolvency Trustee. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. This makes them well positioned to review your financial circumstances and recommend an appropriate form of debt relief for you. Filing a consumer proposal can wipe off up to 80% of your unsecured debts while enabling you to keep your assets, and filing bankruptcy can offer you the fresh start you may need. At Spergel, we have been helping Canadians to gain debt relief for over thirty years.

Long term payday loans: FAQs

What is the longest term a payday loan can be?

Payday loans are usually for an amount of no more than $1,500, and for a term of no more than 62 days excluding any extension or renewal. Due to the short term, it can be difficult for many individuals to make their repayments on time. This in turn can lead to taking out another payday loan in order to pay off the first. For this reason, it is important to break the cycle as soon as you can. At Spergel, we will review your options and help you to break your cycle.

Are payday loans illegal in Canada?

No, payday loans are not illegal in Canada. They are permitted under section 347.1 of the Criminal Code, provided the provincial laws are followed. In Ontario, all payday lenders must be licensed by the Ontario Ministry of Government and Consumer Services, and so it is incredibly important to check your lender is on the list before taking out a loan. All licences must be displayed in the store or on the website, too. Unfortunately, there are plenty of fraudulent payday loan lenders out there and it can be a risky business taking out a loan. At Spergel, we recommend you speak to one of our Licensed Insolvency Trustees if you are unsure on the legitimacy of a lender. We can review your financial circumstances and recommend a pathway for you.

What is the maximum payday loan amount in Canada?

In Canada, you can borrow up to a maximum of $1,500 on a payday loan and you have up to 62 days to make your repayment. Payday loans are different from other forms of loan in Canada because they are intended to only be short term. Traditionally, they are intended to tide you over until your next paycheque, at which point you make your repayment. It is also possible to secure a payday loan without a credit check.

While payday loans can provide immediate financial relief for many Canadians, their long term consequences can be severe. Borrowers should exercise caution, consider alternatives, and seek financial guidance from a Licensed Insolvency Trustee to avoid falling into the pitfalls of long term payday loan debt. Book a free consultation with a Licensed Insolvency Trustee at Spergel to gain a clear understanding of the potential long-term repercussions of payday loans, and your alternative options.

What to read next

• Payday loans and bankruptcy: everything you need to know
• Payday loan alternative – what are my options?
• How do payday loans work?
• What is a payday loan?
• Living paycheque to paycheque: how to break the cycle

Can you include payday loans in a bankruptcy in Canada?

Yes, payday loans can be filed as part of a bankruptcy, meaning they can be written off for good. In fact, you may be interested to learn that payday loans are involved in a staggering 40% of insolvencies in Canada – this means they are included as part of almost half of all bankruptcies or consumer proposals filed. This is because for many Canadians, payday loans spiral out of control. What may have been intended as a short term solution to cashflow issues can quickly result in spiralling debt due to crippling interest rates. It is all too easy to take out a second payday loan to pay off the first, and so on. This way, you can end up owing multiple payday loans to different lenders, and at Spergel we help thousands of these individuals to gain debt relief each year. Because payday loans are an unsecured debt, they can be discharged via the Bankruptcy and Insolvency Act. This means that when filed in a bankruptcy, they can be eliminated for good. Many individuals who face issues with payday loans also carry other debts, too – our experienced team can help with clearing those too. Payday loans can become a vicious cycle of borrowing more to repay other debts, and it can often delay an inevitable bankruptcy. By booking a free consultation with one of our experienced Licensed Insolvency Trustees, we will review your financial circumstances and advise you on your best options to beginning a fresh financial future.

What are the advantages of filing bankruptcy for payday loan debts?

There are several advantages to filing bankruptcy for payday loans:

• Payday loan debts are permanently eliminated, along with any other unsecured debts you may have
• You are no longer tied to making debt payments, and instead can use your money towards your personal living expenses without the need for payday loans
• You are protected from your creditors via a stay of proceedings

If you are considering bankruptcy as a debt relief option, the sooner you file, the better. This allows you to tackle your debt sooner, begin saving money, and start to rebuild your credit score as soon as possible. This will enable you to be eligible for more preferable credit options instead of expensive payday loans.

Can you include payday loans in a consumer proposal in Canada?

There is a common misconception that bankruptcy is the only form of debt relief to assist with removing the issue of payday loan debt in Canada. In fact, a consumer proposal will also substantially reduce payday loan debt. Consumer proposals are a more favourable option for those with a higher income. Typically, over 50% of Canadians struggling with payday loan debt often exceed the government threshold for income, meaning that they need to pay additional payments during their bankruptcy. This is referred to as surplus income. A consumer proposal will likely make more sense than payday loans and bankruptcy in the following circumstances:

• You have over $10,000 in debts including payday loans
• Your income exceeds the government surplus income threshold
• You have assets you would like to keep, like a vehicle or home equity

At Spergel, we have a 99% acceptance rate on any consumer proposals we file, meaning that when you file with us, you have a 99% chance of significantly reducing your debts by up to 80%.

Does credit counselling assist with reducing payday loans?

Unfortunately, credit counselling is very unlikely to reduce or clear payday loan debt. While credit counselling agencies will try to reduce the interest associated with your payday loan debts, and try to educate you on financial management, they will typically enrol you in a Debt Management Program. Although for some Canadians, Debt Management Programs can be a helpful way to structure their debt and keep them on track to a future free from debt, for payday loan debts, they are of little use. Debt Management Programs are voluntary, meaning that payday lenders are not obligated to participate. In most cases, they will want to reclaim as much of their money as they can, and will not wish to reduce the associated interest rate on the debt. Often with payday loan debts, a more drastic form of debt relief is required. As both bankruptcy and consumer proposals are legal forms of debt relief, creditors need to comply. If you have a lot of payday loan debt and other debts, a consumer proposal or a bankruptcy is a better option as it is legally binding on every creditor if your consumer proposal is approved.

Ensuring your payday loan debt gets eliminated

Below are a few tips and tricks to ensure your payday loan debt is successfully cleared without a hitch:

• Switch your bank account before filing a consumer proposal or bankruptcy. This will stop your payday lender automatically withdrawing funds from your account, and even claiming that they were unaware of your filing. Both bankruptcy and consumer proposals trigger a stay of proceedings, which means that creditors are not allowed to contact you and try to collect.
• Stop making payments to your creditors as soon as your bankruptcy or consumer proposal is filed.
• Ignore requests for payment once you have filed. Some payday lenders may try their luck and attempt collections from you, but there is no obligation for you to pay. Simply remind them that you have filed for debt relief, and you do not need to pay.
• If you have filed bankruptcy, ensure you complete your bankruptcy obligations on time to ensure it does not prevent or delay your discharge.

If you feel like you are stuck in a payday loan cycle that you want to break, or are struggling to keep on top of your payments, book a free consultation with Spergel. Our expert Licensed Insolvency Trustees are here to help you, and will answer all your questions about payday loans and bankruptcy. We will review your financial circumstances and offer our advice on the best form of debt relief for you. Reach out today – you owe it to yourself.

Why can payday loans be considered dangerous?

Before assessing the available payday loan alternatives out there, you may be wondering why we are sharing alternatives in the first place. There are a number of reasons why payday loans can cause financial damage instead of helping to improve your financial situation:

• Extremely expensive – the interest rates charged on payday loans can be truly astronomical, and often up to 400% APR. If you are not careful to repay your payday loan on time, you can quickly find them to be extortionate and very difficult to pay back in full by their due date.
• Payday lenders can be predatory – often we see payday lenders that will prey upon vulnerable borrowers, who they know may get caught up in the vicious payday loan cycle. This is so that they can benefit from the high interest rate applied to each loan. Borrowers should be aware of these lenders who make it all too easy for them to be approved for a payday loan.
• The payday loan cycle â€“ unfortunately, it is all too easy to find yourself trapped in a payday loan cycle. This happens when you do not meet the payday loan due date, and find yourself needing to borrow again. Now, you have a payday loan and need to pay high interest on top of the original loan. This can quickly rack up the amount that you owe, and before long you might find yourself in a cycle that is very difficult to break.

Should I consider a payday loan alternative?

There are plenty of cheaper payday loan alternatives that are well worth exploring before you jump to taking out a payday loan. Payday loans are extremely expensive – in fact, it is not unusual to see a 400%+ APR (annual percentage rate), which is surprisingly perfectly legal and within provincial regulations.

What are the main payday loan alternatives?

Applying for financial assistance

You may be eligible to receive financial support for essential expenses like rent and utility bills from local non-profits. You should check any provincial and municipal sites to see what government assistance might be open to you, e.g. Toronto Rent Bank, which offers grants to any residents of Toronto who meet their criteria and may be struggling to keep up with their rent payments. If you are a student struggling with student loan debt, you should check in with your school’s financial aid services to see if you meet the criteria for any student loans or aid.

Advantages of applying for financial assistance:

• No increase in debt
• Free support – any help from non-profits will be free or very inexpensive

Disadvantages of applying for financial assistance:

• Strict eligibility criteria – you may not meet the requirements
• Additional effort and administration required in order to seek out non-profits that may be able to help

Instalment loan

An instalment loan is a variety of personal loan, often supplied by online lenders. They are usually quick to receive, and have lower interest rates and more generous repayment terms than payday loans. Instead of needing to repay in one lump sum, instalment loans allow you to repay your loan over a defined timeframe. Lenders are most interested in your ability to make your repayments – they will be less concerned by your credit score which you apply, which is ideal if you have a poor credit score.

Advantages of an instalment loan:

• Instalment loans usually last between 3 and 60 months – this means you can spread out your payments to make them more affordable
• Bad credit is considered
• Borrow more than $1,500, which is more than the amount capped on payday loans

Disadvantages of an instalment loan:

• High interest rates – APRs usually range from between 18% to 47%, and this can be towards the higher end if you have a poor credit score

Compare instalment loans

Below, we have listed some of the most popular instalment loans in Canada:

Get a line of credit

While it may be difficult to secure a line of credit from a bank – particularly if you have a weak credit score – online lenders may consider you instead. Lines of credit enable you to borrow funds up to a certain limit, and you simply pay interest on the amount that you borrow. It is a good payday loan alternative because it offers more flexibility.

Advantages of a line of credit:

• Flexible terms – you can pay off your loan in part or in full at any time, without penalty. This can help you to recover your financial situation without the pressure of strict deadlines
• Cheaper than payday loans, thanks to reduced interest rates

Disadvantages of a line of credit:

• Expensive means of borrowing – although cheaper than a payday loan, interest rates on some lines of credit can be up to 46.96%
• The potential to pay more interest. If you take advantage of the flexibility of a line of credit, you may wish to delay making your loan repayments and end up paying much more in interest
• The potential to end up in greater debt. As you are able to borrow more in a line of credit, it can be tempting to borrow more than you may be able to afford.

Borrowing on credit card

Credit cards generally have much lower interest rates than payday loans, making them a great payday loan alternative. Even if your credit card has reached its limit, you should see if you can increase your credit card limit before taking out a payday loan. A strong history of making payments on time will help strengthen your case for a limit increase.

Advantages of borrowing on credit card:

• A cheaper payday loan alternative, as most credit card interest rates are much less at around 20% APR
• The potential to earn rewards like flights and cashback

Disadvantages of borrowing on credit card:

• You run the risk of not being approved for a credit card or a limit increase if you do not have a good credit score

Debt consolidation

If you are struggling to juggle multiple debts, a debt consolidation loan could be a good payday loan alternative for you. A debt consolidation loan is a new loan that is taken out to condense multiple other unsecured debts you have. As well as condensing your debt and simplifying your payments into a singular monthly bill, debt consolidation loans also have the advantage of reducing and sometimes even clearing your interest.

Advantages of debt consolidation loans:

• Simplification of your debts – just one payment to make each month instead of multiple different bills to think about
• The potential to lower your interest rate

Disadvantages of debt consolidation loans:

There is a risk you would not be approved for a debt consolidation loan if your finances are not in a good way

Negotiate with your creditors

The bottom line is that your creditors will want to reclaim as much of their money as they can. In some cases, your creditors might be willing to collaborate with you on a repayment plan. In most cases, it is best to be transparent with your creditors in order to get the best result. If they are aware that you are struggling with your debt but trying to find a solution, it is more likely they will try to help. They could work with you on a repayment plan, or extend the deadline for your debt. It is worth a try, although do note that informal negotiations do not have any legal backing.

Advantages of negotiating with your creditors:

• No additional debt or cost, as you are not taking on additional funds that you need to repay

Disadvantages of negotiating with your creditors:

• Creditors do not need to comply with your negotiations – there is no obligation for them to do so either

Ask friends or family for financial support

Another payday loan alternative is to lean on your family or close friends for financial help. It may not be the most comfortable conversation to have, but it may be able to resolve your financial issues completely without the need to take on more debt. Some family members or friends may be more than willing to help. It is a good idea to try and make any agreements as formal as possible, with agreed deadlines for repayments. Typically, this payday loan alternative is interest free although you should still take your repayments seriously to avoid any potential issues.

Advantages of asking friends or family for financial support:

• Flexible repayments – as the arrangement is typically less formal, you may be able to secure a no interest payment and a repayment term that works for you

Disadvantages of asking friends or family for financial support:

Potentially damaged relationships if you do not follow the agreement on your loan

Consider a form of debt relief

When other payday loan alternatives may not be quite right for your circumstances, your first port of call should be a Licensed Insolvency Trustee. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. Gaining legal debt relief is far more effective than taking out a payday loan. Instead of adding to your debt, it can reduce your unsecured debt or completely eliminate it altogether. Here are the most popular forms of debt relief in Canada:

Consumer proposal

A consumer proposal is a legal form of debt settlement that can reduce your debt by up to 80%. It is the process of working with a Licensed Insolvency Trustee to put forward an affordable monthly repayment amount forward to your creditors. Your trustee will negotiate with your creditors on your behalf. If accepted, you will only need to make your monthly repayments for a fixed period of time for up to five years. Consumer proposals have a number of key advantages, including the ability to keep your assets and protection from your creditors via a stay of proceedings. At Spergel, we have a 99% acceptance rate on any consumer proposals we file.

Bankruptcy

Bankruptcy in Canada is the process of assigning any non-exempt assets you may have over to your Licensed Insolvency Trustee for sale. The proceeds will go towards your creditors, and in exchange you will be cleared of your unsecured debts. It is the best route to a completely fresh financial future, and has the added advantage of putting an immediate end to any legal action from your creditors, including wage garnishments, collection calls, and liens. At Spergel, we have been helping Canadians to file bankruptcy for over thirty years. Unlike other bankruptcy firms, you will be assigned your very own Licensed Insolvency Trustee who will walk you through each step of the process, instead of passing you from person to person.

If you are considering a payday loan alternative, your first port of call should be to book a free consultation with an experienced Licensed Insolvency Trustee at Spergel. Our extremely understand and compassionate team will take the time to review your financial circumstances with you, and help to recommend the best forms of debt relief to improve your finances, instead of creating additional debt. Reach out today – you owe it to yourself.

What is a payday loan?

Payday loans are short term loans that come with a high interest rate. They offer quick access to much needed funds from a third party lender, as opposed to conventional lenders like banks or financial institutions. Payday loans get their name from the idea that you repay the loan on your next pay day, in line with a two week pay cycle. Usually, you will be able to borrow up to 50% of your take home pay on your next paycheque. Payday loans come with high fees that make them a very expensive way to borrow money. In Alberta, British Columbia, Manitoba, New Brunswick, and Ontario, you have up to 62 days to repay a payday loan. If you cannot repay your payday loan on time, you will face additional fees and interest rate payments, which will increase your overall debt. For this reason, you should avoid relying on them for everyday costs and bills, and should always try to repay it on time.

How do payday loans work?

If you go to take out a payday loan, it may be at a physical lender or online. Typically, payday lenders will want to see evidence of a regular income, a bank account, and a permanent address. Before they will approve a payday loan, they will also ask you to complete a form permitting them to withdraw the total loan amount from your bank account when it is due, or for you to provide a post-dated cheque for the total loan amount including fees. If you are granted a payday loan, the money will be deposited into your account or given in cash. It is possible to get given the money on a prepaid card also. When it comes to loan repayment, you will probably need to pay at the same place you took your loan out. For this reason, when you come to sign your payday loan agreement, you need to carefully read it and ensure you understand the terms and loan costs including any fees or interest rates. You should also be extremely wary of any payday lender – many do not have licenses or follow provincial rules. Do not use any online payday lenders outside of Canada as they come with greater risk.

What are the risks of a payday loan?

There are a number of risks associated with taking out a payday loan. First of all, you need to make sure you are borrowing from a licensed payday loan lender in Canada. You can check this via your federal or provincial consumer affairs office to make sure they are a licensed lender. Another risk of payday loans is not being able to make your repayment. Payday loan interest rates are calculated on an annualized basis, and interest rates are much more expensive than other financial products like credit cards and regular bank loans. In fact, payday loans can charge up to a whopping 400%, while regular bank loans may charge 5% per year. While the demand for payday loans appears to be growing in Canada, they are often highly criticized for their extortionate interest rates and lack of flexibility in terms. Payday loans require one full repayment, complete with interest, and become much more expensive if you cannot make it on time.

How much do payday loans cost?

Payday loans are expensive ways to borrow money because you pay high fees, and you may have additional fees if your payment does not go through for any reason. This can make your loan even more difficult to repay which can lead to increased stress overall. In Canada, payday lenders must state their rates upfront as an annualized percentage rate (also known as APR). This makes it much easier for consumers to compare rates of financial products, no matter how long the loan or credit may be needed for. Limits for these interest rates are regulated by the provincial government. Here are the interest rates per province:

What if you cannot repay your payday loan on time?

Given the expensive nature of payday loans, there are some consequences to be aware of if you are unable to repay your payday loan on time. Depending on your province of residence, these consequences include being charged if you do not have sufficient funds in your account. There could also be continued fees if your situation does not change. Other consequences include your payday lender calling your family, friends, or employer to try and collect the money from you. They may also engage a collection agency, pursue legal action against you, seize your property, or get a wage garnishment order against you. For this reason, it is so important to seek debt relief as soon as you feel you may need it. As soon as you are able to share your situation with a reputable Licensed Insolvency Trustee, the sooner we can help you to find an appropriate debt relief solution. You will feel a huge weight lifted from your shoulders.

What are the best payday loan alternatives in Canada?

Before you take out a payday loan, you should make sure you can repay the loan on time, as well as covering your regular expenses. If you do not think this is possible, there are a number of payday loan alternatives out there. You should consider alternatives before you decide to take out a payday loan. Here are the best payday loan alternatives in Canada:

• Ask for a pay advance from your employer
• Borrow money temporarily from family or close friends
• Get a line of credit from your bank or financial institution
• Get a cash advance on a credit card
• Get a personal loan from your bank or financial institution
• See if you can cash in vacation days
• Ask for additional time to pay your bills – depending on who you owe money to, they may allow you extra time to find a means of repaying them

If you are still wondering ‘how do payday loans work?’, reach out to the team at Spergel. You can book a free consultation at a time that suits you, and one of our Licensed Insolvency Trustees will work with you. We can review your financial circumstances, look at payday loan alternatives for you, and find a debt relief solution that will give you a fresh financial start.

What is a payday loan?

The term ‘payday loan’ is pretty misleading. It implies a loan that is tied against a paycheque, but that is far from the reality. So, what is a payday loan? A payday loan is a short term loan that usually incurs a high interest rate. It is lent by a third party, and gets it name from the idea that the terms and conditions of the loan are in line with a two week pay cycle. Payday loans typically allow you to borrow around half of the take home pay on your paycheque. The idea is that a payday loan will tide you over until you receive your paycheque within two weeks, with the addition of interest. The most important thing to note is that the interest rate on payday loans on an annualized basis is much, much higher than other forms of debt like credit card debt, lines of credit, and even bank loans. You can borrow up to $1,500, and in Alberta, British Columbia, Manitoba, New Brunswick, and Ontario, you have up to 62 days to repay a payday loan. Your debt will increase if you cannot pay it back on time, and you will face further interest charges and fees.

What happens when you take out a payday loan?

Payday loan lenders are often private companies or institutions. If you are thinking of taking out a payday loan, here is what you should expect:

• Payday lenders will want to see proof of a regular income, a bank account, and a fixed address
• You will need to complete a form to allow the lender to take the total payday loan amount, including fees, from your bank account on its due date
• Your money will be paid into your bank account, given as cash, or offered as a loan on a prepaid card
• You will need to sign an agreement including the loan costs, interest, fees, and due date

Things to ask a payday loan lender

There are a number of key considerations you should make before taking out a payday loan. Before you borrow, you should ask your payday loan lender the following:

• What is the total cost of borrowing a payday loan?
• Can you provide a breakdown of the fees, charges, and interest of the payday loan?
• What date is the payday loan due?
• What is the maximum cost you can be charged for the payday loan?
• What are the fees applied if you cannot pay your payday loan in time?
• Is there a cooling off period?
• Can you share a copy of the loan agreement?

What are the disadvantages of payday loans?

Although they offer a quick way to receive emergency funds and are becoming increasingly popular across Canada, there are a number of disadvantages of payday loans. The primary disadvantage is their extremely high interest rates. Should you not be able to repay your payday loan when it is due, there are further disadvantages including fees and additional interest to be paid. Their strict terms including one full repayment of the payday loan and interest can be considered predatory, to take advantage of those in need of financial help. Borrowers should also be wary of which payday lender they choose. Some lenders are illegitimate, and do not follow the rules laid out to protect Canadians borrowing money. Make sure the payday lender you choose is licensed by contacting your provincial consumer affairs office, and be extra cautious of payday lenders located outside of Canada. Should you incur problems with a lender in another country, it can be challenging to resolve them. You should also be wary of online sites claiming to offer payday loans, as many will defer to other payday lenders.

What do payday loans cost?

Payday loans are a very expensive way to borrow money in Canada. This is due to high fees, high interest rates, and potential charges if your repayment does not go through. Any lender of a payday loan in Canada is required to share the rates they charge for borrowing as an APR, or an annualized percentage rate. This offers a straightforward way for consumers to compare fees and make a decision on which payday loan to choose from lenders, even if the loan is required for less than a year. The following table shares the interest rates that payday lenders can legally charge per province as of 2022.

As you can see, these are high charges. This can make your payday loan more difficult to repay, which in turn can create overwhelming debt and financial stress. For this reason, before you take out a payday loan, you should ensure you can repay it within the deadline specified. Otherwise, it can be a slippery slope to escalating debt and financial troubles that may require a form of debt relief later down the line.

Who usually takes out a payday loan?

Given their status as an ’emergency fund supplier’, payday loans are usually targeted at a specific group of people. These people fall under the ‘ALICE’ demographic in Canada – consumers who are Asset-Limited, Income-Constrained, and Employed’. Most often these are renters, and single-parent households. Often the issue is not with who is borrowing payday loans, but how they are used. Most payday loan borrowers take out multiple different loans to repay previous loans and debts. Due to the additional fees incurred from payday loans, they can often lead to spiralling debt and a cycle that is difficult to break.

What if you can’t pay back a payday loan on time?

As you may expect, there can be serious consequences if you do not repay your payday loan on time. The consequences vary depending on the province in which you live. Should you not have sufficient funds in your account for repayment, you may be charged a fee by both your lender and by your financial institution. Your payday loan lender could contact your friends and family to try to collect their money, and they could engage a collection agency. They could also pursue legal action against you, seize your property, or even proceed with a wage garnishment. Therefore, if you are unable to make your payday loan payments on time, you can get stuck in a rut. For this reason, it is really important to consider whether or not a payday loan is the right move for you.

What alternatives to payday loans are out there?

There are a number of alternatives to payday loans in Canada, each of which may be much better depending on your circumstances. Each of the following are worth considering before you settle on a payday loan, often offering a much cheaper way of borrowing money:

• Ask for more time to pay bills – try contacting whoever you owe money to to see if you can have a deadline extension for paying your bills
• See if you can trade your vacation days at work for additional money
• Ask your employer for a pay advance
• See if any friends or family can loan you money to tide you over temporarily
• Take out a line of credit from your bank – although be warned you will pay interest on the amount you borrow until the loan is paid in full
• Get a cash advance on a credit card – you are charged interest immediately, but the rate is much lower than with a payday loan
• Take out a personal loan from your bank

Want to know more about ‘what is a payday loan?’ Or stuck in a vicious debt cycle and unsure how to break it? Consider the consequences of payday loans and suitable alternatives with Spergel. Book a free consultation today to see how we can help you gain debt relief and find you the best solution depending on your financial circumstances. You owe it to yourself.