If money is tight and you are struggling to repay overwhelming debts or bills, you may be considering a payday loan. But what is a payday loan? And how do they work? You may also be wondering about the implications of not repaying your payday loan. In short, a payday loan is a loan that is taken out short-term, often incurring a high interest rate. Typically, they require repayment within a two week payday cycle. They are often intended to fill an immediate need given their quick availability, but can be dangerous when not repaid immediately. In fact, they can encourage you to rack up more debt and often take advantage of Canadians who are unable to borrow from other sources like regular lenders and banks.
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.
| Province | Maximum charge per $100 loan | Annualized percentage rate for payday loans (based on a two-week loan) |
| Alberta | $15 | 391% |
| British Columbia | $15 | 391% |
| Manitoba | $17 | 443% |
| New Brunswick | $15 | 391% |
| Newfoundland and Labrador | $21 | 548% |
| Nova Scotia | $19 | 495% |
| Ontario | $15 | 391% |
| Prince Edward Island | $15 | 391% |
| Quebec | n/a | 35% |
| Saskatchewan | $17 | 443% |
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.