Canada Payday Loans
If you need access to quick cash, you might be considering taking out a payday loan.
But before you do, you need to be aware that…
Payday loans are an especially difficult type of debt to pay off. And they can leave you trapped in a cycle of debt.
What is a payday loan?
A payday loan is a short-term loan for a small amount (typically around $500) in which payment is due on your next payday.
You can borrow a maximum of $1,500 from a payday lender.
Pros and cons of payday loans
Pros
- Fast & easy access to cash
- Convenient
- You can find a lender online
- No credit check needed/Easy approval
Cons
- Ultra-high interest (between 390% to 650% depending on your province)
- Additional fees
- Borrow amount limited (up to $1,500)
- Short repayment terms (2 weeks)
- Repayment in full, including interest and fees
- Risk negative impact on credit report
- Risk being locked in endless loan cycle
How do I take out a payday loan?
You’ll need to provide your payday lender with proof that you have a:
- Regular income;
- Bank account; and
- Permanent address.
You’ll also need:
- A government-issued ID showing you’re 18+ years of age;
- A reference, if required by the lender, to be contacted if you default on the loan so the lender can reach you; and
- A post-dated cheque (or pre-authorized debit form) for the total loan amount, including fees. This will be cashed (or withdrawn) by the lender when the loan comes due.
As part of the loan process, you’ll sign an agreement that documents the cost of the loan, including its interest and fees, as well as its due date.
If you end up taking out a payday loan, read the agreement carefully before signing. And get a copy for your records.
Can I get a payday loan online?
Yes. If you do, make sure the online payday lender you select is located in Canada.
Also, verify that the lender holds a license by contacting your provincial or territorial consumer affairs office.
Only licensed payday lenders are obligated to follow provincial rules that were made to protect you.
How much does a payday loan cost?
The cost of a payday loan depends on your province, but it is extremely high. It ranges between 390% to 650% depending on your province.
For example, in Ontario, the Payday Loan Act limits the amount an individual may be charged to $15 per $100 borrowed for a two-week period.
Many debtors think this means that the interest rate on the payday loan is 15%. But that’s not the case.
To understand how payday loan interest works, you need to calculate the annual percentage rate (APR) of the payday loan.
The APR is the interest rate that you pay for the whole year.
Once you know the APR, you can compare the payday loan interest rate to that of credit cards, bank loans, lines of credit, and so on.
How can I calculate the APR of a payday loan?
This calculator will help you figure out the APR of a payday loan.
Let’s calculate the APR of a payday loan in the amount of $100 to be repaid in two weeks. The cost will be $15 (under Ontario law).
Simply plug this information into the calculator and you’ll see that the APR comes in at just over 390%.
Now let’s take a moment to put this 390% APR into perspective:
- Loans and lines of credit from financial institutions range from 3% to 40%, depending on your creditworthiness.
- Credit cards have an average APR of 19% to as high as 30%.
- The Criminal Code of Canada specifies that an effective annual rate of interest over 60% constitutes a criminal rate.
What happens if I can’t repay a Canada payday loan?
The answer depends on what province you’re in.
The only certainty is that…
When you can’t repay a payday loan, the total amount you owe, including fees, increases exponentially.
Generally, if you cannot repay your loan, the payday lender:
- can charge you a fee if your account has non-sufficient funds (NSF) to cover the post-dated cheque/pre-authorized debit you gave them. Your financial institution can also charge you an NSF fee.
- can call your friends, relatives, and employer to contact you to collect the money.
- can work with a collection agency to recover the debt.
- or a collection agency can garnish your wages.
- or a collection agency can sue you for the debt.
- or a collection agency can seize your property.
It’s worth nothing that if you live in Alberta, British Columbia, Manitoba, New Brunswick, or Ontario, you can extend the payback period for up to 62 days using “rollovers.”
What is a rollover?
If you can’t repay the loan before it’s due, some provinces allow you to rollover the loan.
This means that you pay a fee equal to the interest you owe. You then get an additional two weeks to repay the loan with another corresponding interest payment.
Alternately, you can take out a new loan to cover the first. This again extends your repayment date.
Why take out a payday loan?
Debtors find payday loans attractive because they’re convenient and easy to get.
1. A payday loan gives you access to immediate cash.
Payday loans are marketed as a helpful bridge between shortfalls in cash flow.
If you’re in a bind, it’s the quickest way to get your hands on some money until your next payday.
Online payday loans have made them even easier to access!
2. You don’t need to prove your creditworthiness.
Unlike traditional banks, payday lenders don’t typically do a credit check on borrowers.
All you need is to show proof of your age (18+), and that you have a job, bank account, and address.
Is a Canada payday loan a good option?
Payday loans are never a good idea.
While super easy to get, they are almost impossible to get rid of.
1. Payday loans subject you to ultra-high interest rates.
They are very expensive compared to other ways of borrowing money.
Before you take one out, be certain you can repay it. Otherwise, your debt will grow rapidly and you risk never being able to catch up.
2. You subject yourself to additional fees.
If your cheque or pre-authorized debit doesn’t go through, you may have to pay fees to your payday lender and your financial institution. This pushes that APR even higher.
3. You can only take out a limited amount of cash.
You’re allowed to take out a maximum of $1,500. For some debtors, this may be less than what you actually need.
So not only does the payday loan not address your financial problems, it puts you deeper into debt.
4. You have to repay your loan in a short amount of time.
Unlike traditional loans that are characterized by a long negotiable repayment period, you must repay your payday loan in two weeks.
In some provinces you can extend the repayment date. There are limits on how many times you can do so.
5. You have to pay your loan back all at once.
Payday loans must be repaid in full (inclusive of interest and fees) by your next pay period.
You have no flexibility to reduce your debt burden. This makes it difficult for debtors who are living paycheque to paycheque.
6. You risk hurting your credit.
Payday loans don’t show up on your credit report unless you fail to repay them.
This means that if you take out a payday loan and actually repay it, you don’t boost your credit.
However, if you fail to repay it, your payday lender may get a debt collection agency involved. It then becomes visible on your credit report.
7. You may be locked in an endless loan cycle.
Many desperate people turn to payday loans for ongoing costs, such as rent, groceries, and utility bills.
But this leads to trouble. They end up having to take out multiple payday loans in the same pay period. They’re never able to catch up with repayment.
I’ve read about installment loans. Are those any better?
Installment loans are a new product payday lenders have come up with.
They give you a higher value amount, up to $5,000, at a 40% to 50% interest rate. The repayment period is also longer, typically 2 years.
Sounds better, right?
Well, unfortunately, many Canadians debtors tend to agree.
A limited online survey conducted by Acorn Canada in February 2021 found that the number of respondents who reported taking out installment loans jumped from 11% in 2016 to 45% in 2020.
This rate is still exorbitant when compared to even high-interest credit cards.
Do I have any other options?
If you don’t have a car, a home, or any assets, you might think the only way you can get a loan is through a payday lender. But there is an alternative. A payday loan is not the solution.
1. Speak to a Licensed Insolvency Trustee.
We list this alternative first because it’s the single best thing you can do if you’re considering a payday loan.
A Licensed Insolvency Trustee can help you come up with a better plan to deal with your debts than a payday loan.
A Licensed Insolvency Trustee (LIT) is a government licensed and regulated financial professional.
LITs have the education, credentials, and experience to help you with all your debt relief options.
An LIT will:
- Review your financial situation;
- Check your monthly budget; and
- Assist you with a range of debt relief solutions, from financial counselling all the way to Bankruptcy.
Your initial consultation with an LIT is free.
And it’s at this initial consulation that you will become informed about how best to proceed with managing your debt.
2. Negotiate repayment with your creditors directly.
Most creditors want to get paid and will work with you on timing. You just need to contact them, tell them about your predicament, and offer to write them a post-dated cheque.
3. Ask your employer for a partial advance on your next paycheque.
Some companies are willing to help you, especially if you’re a trusted, long-term employee. It’s far better to get an advance from your employer than a payday lender.
Just make sure you have a plan in place to cover expenses for the next pay period, as your take-home will be lighter.
4. Cash a cheque.
Typically when you deposit a cheque in person at the bank, your funds are available right away.
If, however, your account is subject to a hold period, the bank will still make $100 available to you immediately. If you deposit your cheque via ATM, you can access that $100 the next business day.
When it comes to government cheques, those of up to $1,500 can be cashed for free at any bank, whether you’re a customer or not. You need only show a piece of identification with your photo and signature, such as your driver’s license.
5. Cash your CERB or CESB cheque.
The Government of Canada has temporarily increased the cheque-cashing limit to $2,000 for emergency benefits-related cheques to individuals.
6. Get a loan from family or friends.
If you have personal contacts willing to lend you money, you can arrange to borrow a fixed amount and pay it back, plus interest, over a fixed period of time.
However, if you aren’t able to repay it, you risk straining that relationship.
7. Get a line of credit or personal loan from a financial institution.
A bank may offer you a line of credit, where you borrow only what you need. Interest is charged on the amount you actually borrow, not the full amount made available to you.
Even though interest ranges from 3% to 50% with these options, they’re still cheaper than a payday loan.
8. Get a cash advance on your credit card.
There’s a far higher interest rate when you withdraw cash from your credit card than for regular transactions on your credit card. What’s more, there’s an additional transaction fee on top of this interest. (And potentially another fee if you withdraw using an ATM.)
That said, the APR is still far less than a payday loan. It’s more like 25% than the 390% we discussed earlier.
If you do go this route, choose a credit card that has no balance and pay it back as soon as possible. If your card has a balance, payments you make go toward that balance first. The bank will continue charging the higher interest on your cash advance.
9. Make use of your account’s overdraft protection, if you have it.
If you have signed up and are approved for overdraft protection, you can withdraw more than you have in your bank account. The excess is overdraft. A small fee will be charged for this service, and interest is also charged. The interest may be around 21% (still far lower than a payday loan’s 390%).
10. Do a payday loan consolidation.
If you qualify for one, take out a loan with a lower interest rate and use it to pay off your high-interest debts, including your payday loans.
You’ll have more manageable monthly payments, a better interest rate, and more time to repay that loan.
11. File a Consumer Proposal or Bankruptcy.
Consumer Proposals and Bankruptcies are legal processes that help to discharge some or all of your debt. They offer you an actual solution to your debt struggles without putting you further into debt.
When you file either a Consumer Proposal or Bankruptcy, you:
- Immediately stop unsecured creditors from pursuing action against you to recover on the debt you owe.
- Put a stop to collection calls and wage garnishments.
- Get started on a path to finally eliminating your debt.
You will need the assistance of an LIT to file for these legal proceedings.
LITs are the only professionals authorized to assist debtors with filing Consumer Proposals or Bankruptcies in Canada.
What if you’ve already taken out payday loans and are struggling to repay them?
Payday debt relief is possible.
You need to contact a Licensed Insolvency Trustee right away.
An LIT will help you get on track to eliminating your debt, so you can get the fresh financial start you deserve.
