Why You Should Avoid Payday Loans
Payday loans can seem like a convenient option for people who need cash quickly. They’re marketed as a way to “get you to pay day” with the idea that people should take out these loans to pay for bills or cover expenses until they get their regular paycheque. However, they’re often incredibly difficult to pay back.
That’s because payday loans come with very high interest rates. These rates are significantly higher than credit cards and nearly every other type of loan.
Since payday lenders often come with high rates, most provinces in Canada have set limits on what they can charge. Even with these limits, however, the costs of getting a payday loan are very high.
For example, in Ontario the maximum cost of borrowing a payday loan is $15 for every $100 that you borrow. This equals 15% interest for two weeks. Over a year, that adds up to 390% interest! Most credit cards charge between 20-30% in annual interest. As you can see, the cost of getting a payday loan is much, much higher than using a credit card.
Of course, payday loans are not meant to be borrowed for an entire year. The general principle is that you borrow the money for two weeks and then pay it back. Unfortunately, this is typically easier said than done.
Why Payday Loans Are So Difficult to Pay Back
When a person takes out a payday loan, it’s frequently because they aren’t able to afford their expenses and they don’t have an emergency fund. If you’re living paycheque-to-paycheque, that means you’re spending all the money you earn each month. Since this is the case, you likely won’t have any money available in two weeks to pay off the loan. And, even if you do, this will hurt your budget going forward, meaning you’ll be more likely to be short on money (and probably need a payday loan again) in the near future.
Most people who get payday loans have difficulty paying them back in time and many people find themselves needing to get another payday loan relatively shortly after they get the first.
This can be a very tough cycle to get out of and it is an incredibly costly way to borrow money and live your life. It often leads to significant money problems.
Payday Loan Alternatives
Since payday loans are a very expensive way to borrow money, it’s wise to consider alternatives. Here are some other options you could use instead of payday loans.
- Take out a small loan from the bank
- Banks and credit unions may be willing to lend you money to help with your cashflow problem. These loans take longer to get approved than payday loans, but they also have much lower interest rates.
- Use a line of credit
- If you have access to a line of credit, consider using it instead of turning to a payday lender.
- Pay with your credit card
- Adding on credit card debt usually isn’t a good idea, but if you’re really unable to afford necessities one month, use your credit card instead of getting a payday loan. However, before you make a purchase on your credit card, make sure you have a plan for paying it off as quickly as possible.
- Contact your creditors
- If extenuating circumstances are making it difficult to afford your bills this month, give your creditors a call and explain the situation. If you have a long history of paying your bills on time, they’ll likely be understanding and give you an extension on your payment.
- Use a cash advance on your credit card
- Cash advances on credit cards charge higher interest than regular credit card purchases, but they still cost less than payday loans. Just be sure you have a plan for paying this money back as quickly as you can.
- Borrow from friends and family
- You may want to talk to friends or family members about your situation and see if you can borrow some money. However, before you do, make sure you have a plan for paying it back on time. Money issues can really harm personal relationships if you aren’t careful.
- Adjust your budget
- Whenever you borrow money or use credit, you need to have a plan for how you will pay it back. However, before you add on additional debt, see if you can temporarily adjust your budget to make ends meet without borrowing. Look at your proposed spending for the rest of the month and see where you can make cuts so you don’t run out of money before the end of the month. This can help you avoid needing a payday loan or any other type of debt to make ends meet.
The Importance of an Emergency Fund
As mentioned, one major reason many people find themselves turning to payday loans is because they don’t have an emergency fund. If you’re living paycheque-to-paycheque and a sudden expense comes up (such as an emergency car repair), you’ll have no choice but to borrow money to afford this expense. However, if you have some money put aside for emergencies, you’ll be able to pay for these unexpected costs without turning to payday loans or other lenders.
Start building you emergency fund by putting aside some money every month and storing it in a separate account. Even if you can only afford to save a few dollars a month at first, this will add up over time.
Add an “emergency fund” category to your monthly budget and “pay” it each month just like you would any other bill or expense. This will ensure that you stay focused on adding to your emergency fund.