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Should You Use Payday Loans to Make Ends Meet?

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Almost everyone has been at a point in their life where they are struggling to make ends meet. According to Equifax Canada, the average person in Canada has about $73,000 worth of consumer debt. For every loan or credit card you take on, you can also expect minimum payments and interest rates to add to your monthly expenses. Eventually, if you’re not careful with your money, you could find your savings dwindling just to keep up with your minimum needs.

For those who find themselves “in the red”, you may look for other types of loans to help pay rent or afford food, and one loan type that many might consider are payday loans. You may have seen a payday loan centre somewhere in your city, but what are they and should you turn to their services when you need a helping hand?

A.C. Waring & Associates Inc. is a team of specialized debt management and Licensed Insolvency Trustees who are here to help you make the right decisions about your financial issues. So before you start adding more debt upon debt, ask us about better ways to manage your present debt load and/or resolve your debt overload.  

What is a Payday Loan?

Payday loans are short-term loans approved by privately-owned lenders, usually strapped with extremely high fees and interest rates, sometimes as high as 500% to 600%. Often people, short on money, may seek Payday loans to pay for necessities or emergencies, like property damage, that you could not otherwise afford with your current savings or income.

In Alberta, You can apply for up to $1,500 per loan and have up to 62 days to pay it back.

Payday loans are easy to apply for and you can usually expect your loan to be provided in cash or deposited directly into your bank account later the same day. Unlike typical loans you may get from a bank, payday lenders, according to Loans Canada, only have a few stipulations before they approve someone for a loan:

  • You must have a regular income.
  • You must have a bank account.
  • You must have a social insurance number
  • You must show proof of a permanent address in the same province as the lender.

You will also need to provide:

  • A form that will allow your lender to take out the money owed, plus interest and fees, when the loan is due.
  • A post-dated cheque for the loan including fees.

And just like that, you will likely be approved for a payday loan. 

However, just because they are so easy to apply for and have a high approval rate for borrowers, this doesn’t mean that this should be an ongoing option for you to help cover your ongoing expenses.

Who Typically Applies for Payday Loans?

Payday loans are controversial in the financing world. Because of how easy they are to apply for, they generally attract low-income borrowers looking for quick ways to pay their bills. In fact, these following groups are 3 times more likely to apply for a payday loan:

  • Families with a debt/asset ratio of more than 5.0 
  • Renters 
  • Single-parent households
  • Young families with parents between the ages of 15 and 24

According to Loans Canada, 50% of payday loan users are at the bottom 20% of net worth, and 80% of that number is at the bottom 40% of net worth. Many people who use payday loans find themselves applying for more payday loans to keep up with the mounting debt they are already generating, leading into a debt cycle that continues for years or even decades.

How Payday Loan Cycles Work

Make no mistake: payday loan companies are for-profit businesses. For every dollar you borrow from them, they are expecting more back in return. What often develops is a cycle that keeps you locked into paying far more money than what you got from your loan. This is known as the payday loan cycle, and it can happen like this:

  • You apply for a loan and agree to the fees and interest rates from the lender.
  • When the due date comes around, your bank account that the payday loan company has access to, does not have enough money to cover the loan plus fees and interest.
  • You may subsequently be charged extra fees, interest, and probably a penalty for not having enough money in the account.
  • You take out another loan to pay for the first, and thus starts the locking you into a payday loan cycle if you are unable to pay the catch up.

To put the interest rates in perspective, the Government of Canada provides an excellent example of what you’re actually paying for when you get a payday loan.

Here is what your fees may look like across different lenders or credit types when you borrow $300:

  • Line of credit: $5.92
  • Overdraft protection: $7.42
  • Credit card cash advance: $7.65
  • Payday loan: $51.00
  • TOTAL:  Loan of $300.00 plus fees or $71.99 = $371.99

Just with this example, it’s clear to see that even though payday loans are fast, it comes at a huge cost.

Alternatives to Payday Loans

Unless you are absolutely certain you can pay off a payday loan by the first due date, do not take out a payday loan. If you are in need of a loan, there are other options available to provide you with money with far lower rates and fees.

Some of these options can include personal installment loans that you can apply for through your bank or credit union. Though harder to get than a payday loan, you can pay for the loan in dividend payments that could actually help improve your credit over the long term. Alternatively, you can also apply for a line of credit that allows you to spend up to a certain limit and only pay interest on what you spend rather than a whole loan.

Struggling with Debt? Contact Us. 

It’s never too late to take control of your finances. A.C. Waring & Associates Inc. is proud to offer credit counselling services to help you understand what you need to do to handle your debt. We can help you develop a personalized debt management plan that will take your monthly expenses into account.  And for those faced with overwhelming debt panic, our Trustees can talk to you about Consumer Proposals and Bankruptcy matters and alternatives.

Our help is only a phone call away. Please contact us today and learn everything you need to know to get your finances back on the right track and to feel better about being informed.

Written by Arthur Waring

Arthur earned his Bachelor of Arts from the University of Western Ontario before earning a Bachelor of Commerce from the University of Windsor. During university, he also participated in a French immersion program in Trois Pistol, Quebec, and has been employed for several national firms over the years.

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