The COVID-19 pandemic has thrown millions of Canadians into financial distress. Many have been forced into taking on high interest or payday loans without knowing the consequences.
Licensed Insolvency Trustee Matt Fader tackles the subject of payday loans. In this podcast he sheds some light on the following topics:
- How payday loans work and how interest is calculated
- The real cost associated with servicing your debt
- How to break the payday loan cycle
- Installment loans, consolidation loans, and credit counselling
Licensed Insolvency Trustees can help you take control of your debt. They are considered some of the best financial advisors in the country and the only ones licensed by the federal government of Canada.
Read the Transcript
Welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across the country. I’m Wayne Kay.
And in today’s show, we’re going to talk about these payday loans. You may see them on TV, hear them on radio, see them and ads, and other debt traps that we need to avoid. To find out more. I’ve got Matt Fader joining me from Allan Marshall & Associates in Halifax, Nova Scotia.
Hey, Matt, thanks for being here.
Matt Fader 0:32
Thanks for having me.
And this is kind of what you deal with – people going into bad debt and then not knowing how to get out of it. Are these payday loans good, bad, ugly? What are they?
Matt Fader 0:44
I would say that they’re certainly not good. They serve a purpose as far as high interest emergency loans, and they come with very high risk associated with them. And the high risk demands a high repayment term and they are very much a trap.
When we look at conventional lending – I don’t know how much you know about conventional lending Wayne, but 60% interest is considered racketeering. So it’s illegal to charge 60% interest. But it is perfectly within somebody’s right to charge 59.9%. And that is the consequence of some of these payday loans when you default on the payments. Now, I don’t know, I’m going to assume you don’t know how they work.
No, I have no idea – my jaw is on the floor. 20% on a credit card to me is outrageous. And I figured that they should be in prison. Never mind, 59%. So yes, please tell me.
Matt Fader 1:56
So a typical payday loan is based on them and they’re really not charging interest on a payday loan, which is kind of a little bit how you skirt around it. And this will be apparent if you ever read the contract of somebody who’s into a payday loan.
But basically, you pay what’s called a borrowing premium. So Wayne, I’ll lend you 100 bucks. I want you to pay that 100 bucks back on your next payday. But I want you to pay me $20 on top of that $100 to pay for the privilege of borrowing. And that’s basically how they work.
You’re paying this premium based on what it is that you borrow. So somebody who borrows $500 for a payday loan to skirt them through the next pay, they’re expected to pay the $500 back -plus say that $20 per $100. So it costs them $600 to borrow that $500 bucks.
So when you think about that, if you’re paid on a biweekly pay schedule, you go in, you borrow $500 bucks, you pay the $600 two weeks later. If you borrow that $500 again, because you know what, you don’t have it, the following week you have to pay another $100 bucks. So in that time, they’ve made $200 off of that $500 that they’ve advanced you.
The problem is, is that a trap exists where it says okay, here’s my $600, but I really need that $600 back. So they end up ordering $600, which means the next time they’re going in, they’re paying that $600 back plus the 20 bucks on top of every 100. So now they’re paying $720.
And more and more – it’s costing them more and more money. And what we typically see is we’ll typically see people with multiple payday loans, because they go to this one to borrow, this one to go over here to pay this one off, to re-borrow and it just skirts around all over the place.
Why? Why do people do this? What’s the reason?
Matt Fader 3:54
A lot of it is there is a certain degree of desperation that comes with it. Unfortunately, you know, I’ll talk to a lot of people that might have addiction problems – I’m saying, okay, I understand that. But, you have people who either have low income, they’re overextended, they’re just desperate for money to be able to buy food or make payments. And it does constitute a form of, some of them constitute a form of predatory lending.
I don’t want to paint all payday loan people with the negative brush, but a lot of them – it does boil down to some degree of your responsible lending. Now, that being said, they make their money and they serve a purpose. And for somebody who says, Look, I’m $100 bucks short this week, and I can afford the 120 and I’ll never borrow again, then they’re perfect service for that.
I don’t want to go through the bank. I don’t need to get a loan for $100 bucks. I just have this emergency that came up and I’ll be able to pay it next week. And I won’t get into that trap, then it’s actually a service that could be beneficial to them, they can afford the hit. And their budget is sound enough to say just maybe there was a – I had to take two days off of work because I was sick or whatever. And I just needed that little bit of extra cash to float me over.
So, they do serve a niche purpose. The unfortunate thing is, there’s a lot of people that are using them, and they’re unaware of what the consequences are, as they get into the cycle of trying to repay them. And, of course, the damage it can have on their finances, their health, their credit, you know, carrying that stress associated with it can be a very terrible burden for somebody.
So they are something to be cautious about, and to really understand what you’re getting yourself into. You know, you don’t want to just get into one because you say, Oh, I want to get a piece of pizza tonight. You know, so, you really do want to make sure that you’re aware of the consequences that come with it. And, at the same time, what are my strategies or my techniques to get myself out of the payday loans?
Right. Okay, so are there other risky lending things I should be avoiding?
Matt Fader 6:27
Well, there are other finance companies out there that are not going to be quite as egregious as that, but they’ll give consolidation loans. I’ve seen consolidation loans that would range anywhere from a bank loan at 8% to one with a finance company at 40%.
I’ve seen a second mortgage on somebody’s house, through a financing company at 28%. And this is a second mortgage, at 28%, goodness gracious. And that security against their house, they have to pay that or that secondary lender can start a foreclosure proceeding against them.
That’s one of the things that you do need to be careful about if you have assets. Because we have run into it on numerous occasions where they say, Oh, yeah, I owe 20 grand to this finance company. And I said, Okay, great – and I do a search. And I’m like, do you realize this is attached to your property? And this is a second mortgage? And they’re just completely floored by it. They just said, Oh, no, they just said, sign all these papers, and we’ll give you 20 grand, and they were unaware of what they were actually getting into. And that’s a very, very dangerous thing when you’re talking about one of your larger assets – being your hands.
Okay. So I think that’s a great red flag for people to be paying attention to when they are in this situation. Is there anything else that pops in your mind stories that maybe you’ve seen something else that people should be aware of before they go signing on the dotted line for anything?
Matt Fader 8:03
Well, a lot of it does boil down to say, what is the cost associated with servicing this? For somebody who says, Well, I want to consolidate, I’ve got four credit cards, and it costs me $100 a month on each of these cards, and that’s interest only.
So they go out and they get a loan. And if the loan payment is $500 a month, how are you any further ahead for what you’ve done? But, one of the other things that you do need to keep in mind, especially in relation to these consolidation loans, is their installment loans. They do have a defined end, which is different than a revolving loan, which just sort of keeps going that you can borrow against.
So for somebody who says, Well, I’m paying $100 a month on four credit cards, so $400 a month, and I’m not getting anywhere because it’s just making the interest only payment. If they were able to restructure their debt so that they say, Okay, well, I can pay $400 a month through this installment loan, and in five years, that installment loan will be paid out. Then that’s actually not a bad solution for them, because at least they have an end in sight and therefore $100 is going towards reducing their debt rather than treading water.
The danger that comes with a consolidation loan. I mean, if I had a nickel for every time that this happened, I wouldn’t be a rich man by any stretch of the imagination, but Wayne, you and I could both get some pretty delicious hamburgers with those nickels. The thing is, what happens is you end up being overextended.
One of the worst mistakes you can make when you get a consolidation loan is to not reduce or close off your available credit – to keep those credit cards open. Because what will tend to happen is if you haven’t adjusted your spending, if you haven’t adjusted the way that you actually spend your money and live your life, you will start to fall back on that credit.
And I’ve seen it time and time and time again. A year ago, somebody went out and got that $30,000 consolidation loan. And a year later, they’re coming to see me saying they owe $28,000 on that consolidation loan, and $30,000 in credit card debt – because they didn’t adjust their patterns. They didn’t adjust their lifestyle. And you know that that $400 that was going on the credit card that went towards the loan, but I still don’t have money to buy food, no problem, I’ll put it on the credit card. And then before you know it, boom, they owe twice as much.
And we’re taught to use our credit cards, though, because you get points. If I use my credit card, I get points. Yeah. Great way to do it, right. Don’t pay any attention to how much it is. I know people who’ve done this, they have no idea how much they’re putting on the credit card, because it’s so quick. They just tap it or they hit their little pin number. And all of a sudden, they’re kind of surprised when the end of the month comes and there’s more payment than there is actual income.
Matt Fader 11:03
Well, that is very much a product of our current environment as far as spending is concerned. You have to keep in mind Wayne – close your eyes and let’s go back to the Wayback Machine.
So once upon a time it’s Thursday, your boss comes around shakes your hand and says, Hey, Wayne, thanks for shaking me and hands you this piece of paper. In this piece of paper for the youngins out there is what was called a check a paycheque. And he or she would hand you this paycheque and you would look at your watch and say, Oh my god, it’s 2:20. The bank would only be open until like 2:30, because that’s where bankers’ hours came from.
So you’d run out to the bank. And you get in this line. And what was at the bank waiting for you was this big line of everyone else that’s in there, same situation. And you’d wait in this line, and they had these pens and they had chains on the end with giant blobs of ink on the other end. And you’d fill in this little weird piece of paper called a deposit slip and you wait in line at the bank for about 45 minutes. And then you’d go see Mildred at the counter who’d been Moses’s banker, and you’d say, Okay, here’s my cheque, put money here, pay this bill, pay this, you know, give me $200 cash back, and I’ll see in two weeks. And that’s how we operate. But the thing was, when we had cash in our pockets, if you ever wanted to know how much money you had left, you would reach in your pocket – you would know.
I can’t speak to your environment. But I know when I was growing up here in Halifax in the 80s, there was one Tim Hortons on Yonge Street, and maybe another one in Bedford. There was one McDonald’s – there was one of everything. Now it’s everywhere. And why is everything everywhere? Because everything has become convenient. And why has everything become convenient – because spending money has become convenient.
So as soon as we rob ourselves of the pain and the effort of getting access to our money, and we make our money easier to spend, then guess what? People spend it. When I would say hey, – impulse aisles didn’t exist back then. You might see your golden books that were there. Remember that at the Dominion store, you guys wouldn’t know what the Dominion store was. But you know, the impulse aisle didn’t exist. There’s a lot of things that didn’t exist because people paid with cash. They knew their budget. They’d go to the grocery store, they go with a list, they went in with $100, they spent $100, because that’s all they had.
Now, if it’s $120, okay, they tap the card. But by the time you’ve hit them to get out of the grocery store, you don’t remember that you spent $120 bucks. Right? So that it very much lends to that capacity over spending. When we deal with credit, when we deal with use of credit or use of convenient money, we really have to hold ourselves accountable. To say, we have to control the outflow of that money because it doesn’t take long for you to forget that. Oh, yeah. I already bought two coffees today.
Right. So as a Licensed Insolvency Trustee – you have people come to you that are in a bad financial situation. One of the great things is there’s credit counseling, which is involved. But what are the first steps to breaking that payday loan cycle that many people are living in?
Matt Fader 14:37
Well, as you know, we would hope that, of course, if they’re coming to see me and they’re doing either Bankruptcy or Proposal, we’re saying okay – well that’s being addressed under this. So you’ve got that fresh start, you’re out of that cycle.
So if they’ve come to me, I’m going to give a finality to that, to say you’re done. You don’t have to go borrow money from them anymore. You now have that reset to say this is the cash that you are paid, so get used to living off it. For people that are avoiding to come see me and Wayne, my job is to talk you out of using my services. You know, as a Licensed Insolvency Trustee, my job is to ensure that we’ve been through all your options before you would deal with me. So, do nothing, consolidate, informal arrangements and everything else.
But for somebody who comes to me that has a very small debt load, and it’s majority payday loans, we’ll walk them through and we’ll coach them through to say, Okay, this is how you break that cycle. You know, it’s my time. I don’t charge them for it. It’s just this is what’s going to help.
And there’s really two ways to break the payday loan cycle. The first is to try and wean yourself off of it. Weaning yourself off is the more expensive – is the more costly of options. But it’s that kind of thing where you say, okay, you’re going in, and you’re paying back $600 Yes, you have to borrow – don’t reborrow, another $600, reborrow, $500. Get used to living without that $100.
Then the next week, when you go and you repay that amount, borrow a little less, and borrow a little less, and borrow a little less, and ultimately to wean yourself off of it. And that gets easier over time. Because of course, you’re one week you’re repaying $600, and you’re borrowing $500. You know, you’re boring, something that’s gonna cost you $500 to repay. And then the next week here, by next time, you’re borrowing something that’s going to cost you $400 to repay. So it’s costing you less money to service the debt, you have less money that’s going out. It’s bringing a little bit of a higher heightened element of balance back into your budget.
The other way to deal with it is really bad for your credit, but it’s really the most cost efficient way. And that comes back to our 60% number. So if we take our example of it costs you $100 every week, to borrow this $500 you can say – well, in two and a half months, you will have paid 100% interest, right? Because it would have cost you $500 to borrow that $500. That’s why they’re not charging you interest. It’s a boring premium.
But if you said no, I’m not going to pay that $500 just gonna stop paying my bill. Well, your contract will typically say okay, if you default in payments, we won’t lend you money anymore. And we will charge you 60% or 59.9% per annum on the debt. That’s a scary number, people. Oh my god. 60%. That’s crazy pants. But think about it. That’s per annum – you bought $100 bucks. If they say, well, it’s gonna cost you $20 bucks to repay. Okay, fine. But if you say borrow $100 bucks, and stop making payments on it – they say, oh, we’re going to get you, we’re going to charge you 60% per annum. Well, you know, over the course of a year, the cost of borrowing on that is $60.
So it’s actually cheaper and breaks the cycle. Again, if you don’t care about the impact on your credit, to actually stop paying it, and just pay the interest as it accrues. Any paying arrangement with them – so you can make that payment arrangement with them and hopefully preserve your credit in that way.
Because ultimately, while the payday loan companies, they want to make money, of course everyone does. You know, reading that contract, understanding your rights allows you to say, Okay, what decision am I going to make. Can I make an arrangement with them to say, I don’t want to borrow with you anymore, I just want to pay this off. So I can only afford to pay this much per month, and here you go, or per pay. And here you go until you wean yourself off that way. So one way involves you sort of weaning yourself off by staying in good standing with them, and preserving your credit. The other one is bad for your credit, but it certainly saves you a ton of money. I think that the third way is to come see somebody like me.
And you mentioned – you said this during the interview you said and it doesn’t cost anything to come to see you go. They can simply reach out to you through your website, wecanhelp.ca and that’s not just out of your kind heartedness.
That’s actually something that is through the federal government, through the Licensed Insolvency Trustees across the country – you can get your first consultation, and it’s free. They look at all the different solutions that you can get to this incredible debt. And the stress that people are living under can end quickly with some advice. So Matt, I think we’re wrapped up for time here, but great show any final words of wisdom?
Matt Fader 19:47
No, like you said Wayne – talking is free. If anybody’s going to charge you for a free consult, then it’s not free. And as a Licensed Insolvency Trustee, we are regulated. We act under the Bankruptcy and Insolvency Act. We are officers of the court. We have a very defined role in what we do. And our job is to ensure that debtors are properly advised of what options are available to them. And that at the very least, you walk out with more information than you thought you ever know. And a lot of times with more options than you thought were possible.
A half an hour phone call can certainly change your life for the better. People can reach out to myself or to trustees in their area, and they should get the same. Well, not the same quality. I mean, I’m the best at what I do, of course, but you know, they should be able to get some good solid advice, and some good orderly direction on how to solve these debt problems.
Terrific. Well, Matt, thanks very much for your time today.
Matt Fader 20:58
No, it was my pleasure, Wayne.
So my guest today Matt Fader. Once again, his website, wecanhelp.ca. He’s from Allan Marshall & Associates in Halifax, Nova Scotia. And that’s it for the podcast for today.
And if you want to subscribe, please do. You always get your notifications right into whatever it is you’re listening to. And of course for more information, you can always check out debtmatters.ca. Thanks very much for listening.
About Matthew Fader
Matthew has worked in the insolvency field since 2005 and joined Allan Marshall and Associates in 2017. His positive outlook helps reassure his clients with any financial insecurities they may have. Matt’s goal is to ensure that everyone has the best possible experience and is treated with respect.