We understand: at first glance, payday loans seem practical and may be a good option when all other options have failed. However, we forget that the convenience of a payday loan can quickly turn into a nightmare and this short-term loan supposed to help you becomes a huge financial problem. The payday loan industry can be complacent, misleading and downright bad, and it’s not a joke. So, if you are thinking of getting a payday loan or if you already have one that is starting to get out of control, here is everything you need to know.
How a payday loan works
Payday loans are a type of loan provided by a specific type of lender. Here is a brief breakdown of what you should expect from a payday loan:
- Payday loans are usually small, less than $ 1,500.
- These are short-term loans; You have until your next payday to repay them (that’s why they are called payday loans).
- Payday lenders work in a retail store or online.
- They are the most expensive type of consumer loan.
- These are unsecured loans; You only need to have some form of income to get an approval.
- You will provide your payday lender with a post-dated check or authorize debit transactions so that they can automatically take payments from your account.
In general, it is extremely easy to get an approval for a payday loan, which is why they are so attractive to people with financial problems.
Your borrower will usually ask for the following 3 things:
- Proof that you have had a stable income for 3 months.
- Proof of address (an electricity bill is usually a good option).
- A checking account so that they can deposit your loan and make payments.
The cost of a payday loan
Payday loans are one of, if not the most expensive form of credit. Before you even consider a payday loan as an option, you must make sure that you have exhausted all other alternatives. In Ontario, laws have been enacted to prevent payday lenders from charging high fees and interest rates. And while this law has helped protect consumers, payday lenders are still predatory. Since there are rules for determining how much a payday lender can charge a borrower in Ontario, we will use that province as an example to show the true cost of a payday loan. But keep in mind that if you live in another province, the laws, rules and regulations will be different and lenders can surely charge extreme fees.
Let’s compare a payday loan in Ontario to a standard credit card offered to anyone in Canada:
|1 loan = $ 300 for 2 weeks||Payday loan||Credit card (23% interest)|
|1 loan will cost||$ 63||$ 2.65|
|2 loans will cost||$ 126||$ 5.29|
|4 loans will cost||$ 252||$ 10.59|
|6 loans will cost||$ 378||$ 15.88|
The law concerning payday loans
In recent years, the majority of Canadian provinces have adopted payday lending legislation. New Brunswick, Quebec and Newfoundland and Labrador are the only provinces that do not have specific payday loan laws. So, if you live in one of these provinces, you have to be extremely careful when it comes to payday lenders.
For other provinces that have adopted payday lending legislation, here are some of the key questions you should be wary of (we suggest that you understand the laws on payday loans or the lack of laws in your province). before going ahead with a payday loan):
- You can not be charged above 23% interest, some provinces charge 21% or $ 21 for every $ 100 you borrow.
- You have 2 business days to cancel your contract; You should not be charged any fees for this period if you decide to cancel.
- You can not get anything other than a payday loan from a payday lender.
- The “Rollover” is illegal. This means that you can not be approved for another payday loan from the same lender if you have not paid your first loan.
Laws for payday lenders
Again this depends on the province where you live, but most payday lenders are required to adhere to at least some version of the following rules:
- Possess a license from the government of the province in which they do business.
- Provide you with specific information about your loan, including: the exact amount of your loan, the length of your loan and the actual cost of your payday loan.
- Never have to ask for a salary assignment or automatic deduction of your pay check.
- Try to contact you more than 3 times a week.
- A payday lender can not try to contact anyone except you to discuss any problem with your loan.
Are you worried about a payday lender?
If you are currently concerned about a payday lender, contact your provincial government’s consumer affairs office.
Always have a repayment plan
Before you consider borrowing for any type of debt, especially for a payday loan, you must have a repayment plan in place. The consequences of being unable to make your loan payments on time and in full will negatively affect your finances for years to come.
Ask the right questions
Before making any decision regarding the application of a payday loan, you should ask yourself the following questions:
- How much will this loan cost me in the long run?
- Is this cost worth it? Do I have other options?
- Are there any hidden fees that I should know?
- Is it a legitimate payday lender?
- Is this payday lender in violation of any of the payday loan laws in the province where I live?
Once you have asked yourself these questions, you should have a better idea of what you are engaging in.