What You Need to Know About Payday Loans
Payday loans can seem like a convenient way to quickly borrow money when you need to pay bills or afford expenses. In theory, they are designed to “help until pay day,” which is where they get their name. However, many people wind up in significant financial trouble due to payday loans. The majority of these issues are caused by people not being aware of the terms and costs associated with payday loans.
Research released in 2016 by The Financial Consumer Agency of Canada found that nearly 90 percent of Canadians who take out payday loans do so to cover necessary expenses or avoid late charges on bills. However, the same survey found that many people are not aware of the cost of payday loans. This cost can be quite high. For example, in Ontario, the interest on payday loans is capped at $18 per $100 dollars borrowed for a two-week period. This comes to 468 percent when it is expressed as an annual rate. However, since payday loans are intended to be short-term loans, interest rates are not required to be listed as annual amounts.
The truth is that many people do not know their rights when it comes to payday loans. This leads to them potentially being taken advantage of by payday lenders or getting themselves into difficult situations without understanding how they got there.
When it comes to payday loans, just like with any other loan, it’s important that you understand all of your rights before you agree to anything.
Here are the facts about payday loans.
Payday loans are short-term loans. As mentioned, and as the name suggests, these loans are designed to “get you to pay day.” Most payday loans are expected to be paid back in two weeks. These loans are not meant to be long-term loans and, therefore, if you do not pay back a payday loan relatively quickly, it can get very expensive.
There are laws set in place in all Canadian provinces regarding the interest rate that can be charged on payday loans, the information provided by payday lenders, and much more.
Specific laws regarding payday loans will vary depending on the province that you live in.
Payday Loans in Ontario
For example, in Ontario, as of January 2017, payday lenders are able to charge a maximum of $18 for every $100 that you borrow. Ontario places additional restrictions on payday lenders, including:
- You cannot be offered or sold any goods or services in connection with the payday loan
- You can cancel a payday loan contract within two business days without paying a fee or having to give a reason
- You cannot get another payday loan from the same lender without paying your first loan in full
- “Rollover” loans (rolling what you owe on a payday loan into a second loan) are not allowed
Even after the two-day period in which you can cancel without penalty, you always have the right to prepay the loan in full at any time, without paying any prepayment charges or penalties. In those situations, you will have to pay the interest that has accumulated on the loan to date.
In addition, payday lenders are required to provide you with certain information on the first page of your loan contract, including:
- The amount borrowed
- The length of the loan
- What you will pay to borrow the money
Payday lenders are also required to display a poster or give out a flyer that details the cost of taking out a payday loan over time.
In addition, payday lenders can never ask for or accept payment by automatic deduction from your paycheque.
If a person does not repay a payday loan, there are restrictions to what a payday lender can do to collect. Payday lenders are not allowed to:
- Contact you more than three times in a week to request payment
- Contact you on holidays
- Contact spouses, family members, friends, neighbours, or acquaintances regarding your loan (unless you have listed these people as references – but can only ask for a message to be given or if you have a new contact number or address)
- Use threatening or intimidating language or excessive or unreasonable pressure
Finally, a payday lender is not able to process a pre-authorized debit or post-dated cheque if it will result in you paying a fee, such as an overdraft or insufficient funds. If the lender does this, you are entitled to recover those fees from the lender and you would not be required to pay the cost of borrowing the loan fee.
Payday Loans in Other Canadian Provinces
Other Canadian provinces also have restrictions and laws regarding payday lenders. Many of these regulations are similar to those in place in Ontario, but there are some important differences.
For example, starting in January 2017, in British Columbia, the maximum allowable charge for a payday loan is $17 per every $100 borrowed for two weeks. In Alberta, payday lenders can charge a maximum of $15 per $100 borrowed, while, in Newfoundland and Labrador, payday lenders can charge $21 for such a loan.
These are just some of the provinces in Canada and information on their laws regarding payday loans. As each province has its own regulations on this subject, it’s important that you take the time to research the laws where you live before you take out a payday loan.
It is also a good idea to consider all available loan options and to weigh the pros and cons of all options before taking out a loan. You may find that, in many cases, other loan options are less expensive to get than a payday loan.