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The Problem with Payday Loans and What You Can Do

If you’re having trouble making ends meet, it can be very stressful. You’ll likely be looking for nearly any solution that helps you pay your bills and meet your financial obligations. One option that can seem very appealing to a lot of people is a payday loan.

A payday loan is a short-term loan that is designed to “get you to pay day.” These loans tend to be pretty easy to get. In most cases, you won’t have to do a credit check to get one and you won’t have to wait a long time for your money. Most of the time, all a payday lender will need to see is proof that you are of legal age and that you are employed. Plus, payday lenders are quite easy to find. In some cities, you can spot one on nearly every block. The convenience of a payday loan can make it seem like a great idea when you’re feeling a financial crunch.

However, payday loans can be very dangerous. A lot of people who take out a payday loan soon find themselves in serious financial trouble.

Why Payday Loans Are Dangerous

The main reason that payday loans frequently lead to trouble is that they don’t actually solve your financial problems. At best, they just delay them, and, at worst, they put you even deeper in debt.

Unfortunately, the reality is that most people who take out a payday loan will struggle to repay it in time. These loans are very short-term, often only one or two weeks in length. While you may have the best intentions when you take out the loan, and you will very likely try your best to pay it back in time, these intentions are not always realistic. It’s tough to find the money you need in just two weeks.

If you need to borrow money quickly to make it to payday, you might have been hit with an unexpected expense that you’re not able to afford. Of course, you may also be spending more than you make, leaving you coming up short. In either situation, the fact remains that you need help because you don’t have any sort of emergency fund. Life is always unpredictable. Even if you budget carefully and do everything you can to live within your means, something could always come up that could throw you off track. And, if it happens once, it’s likely to happen again at some point in the future. A payday loan doesn’t resolve this situation.

A lot of people who get a payday loan end up unable to repay it in time. Many Canadians do not have adequate emergency savings and a lot of people in Canada live paycheque-to-paycheque. This makes it very difficult to repay a payday loan in time without hurting yourself financially.

Be truthful with yourself before taking out a payday loan. If you don’t have the money now to pay for your expenses, will you really have it in a couple of weeks? Yes, you’ll get paid at that time, but since you don’t have any savings, you’re likely living paycheque-to-paycheque. That means there’s a good chance that you’ll need the money from your next cheque to afford other expenses. So where will you get the money to repay the payday loan? And, even if you can pay the loan off in time, how will you afford the rest of your expenses going forward?

While a payday lender is not legally able to give you another loan until you’ve paid off the first loan, this doesn’t stop you from ending up in a “revolving door” of debt. If you can’t repay your loan in time, you may be tempted to head to a different lender – and perhaps even another payday lender – to get another loan. If you do, this can make your debt problem even worse. Now you’ll have two loans to pay off.

Even if you do pay your loan off in time, if you have no savings and are living paycheque-to-paycheque, how long before you need another loan to make ends meet?

Payday loans are band-aid solutions at best that doesn’t solve your financial problems and, if you can’t pay them back in time, they can cause financial ruin.

The Costs of Payday Loans

A big reason why payday loans are a problem is that they are very costly. How costly? That depends on where you live. That’s because different provinces and territories in Canada have different laws for what payday lenders can charge for loans.

For instance, in Ontario, as of January 1, 2018, the maximum cost of borrowing a payday loan is $15 for every $100 that you borrow. This means that if you borrow $200 for two weeks, it can cost you up to $30 to do so. That doesn’t sound like a lot, but remember that a 15% interest rate for just two weeks. Over the course of a year, that adds up to 390% in interest! Compare this to a credit card, for example, that may have an Annual Percentage Rate (APR) of 20% and you can see how expensive payday loans truly are. Even if you get a cash advance on your credit card, and pay a higher interest rate to do so, you still won’t be paying anything close to 390% in one year.

Of course, payday loans are not designed to be paid back over the course of a year. These are short-term loans that you are expected to pay back in a couple of weeks. However, as mentioned, doing this is much easier said than done. If you’re not able to pay your payday loan back in time, the borrowing costs will add up very quickly.

It’s also important to note that, if you default on a payday loan because you are unable to pay it back, your debt could go to a collections agency and your credit score will likely be damaged. This will make it much more difficult to get other loans (credit cards, lines of credit, automobile loans, etc.) in the future.

Alternatives to Payday Loans

There are many other types of loans out there that are more affordable than a payday loan. If you need cash, try to take out a personal loan at a bank, use a line of credit, get a cash advance from your credit card, or simply pay with your credit card instead of using cash. While it’s usually not recommended to take on additional debt, all of these options are less expensive than getting a payday loan, so choose them before you visit a payday lender. However, as with any loan, before you borrow money, it’s important that you have a plan for how you’re going to pay it back.

Of course, one of the main reasons that people who need help financially choose to go to a payday lender is because they don’t have good enough credit to get a loan from anyone else. If you find yourself unable to pay your bills and aren’t able to get a loan from another lender, you may want to talk to your creditors. Most creditors will understand if you have a short-term cash problem and they may be willing to allow an extension or waive the fees associated with making a late payment if you are honest with them. This is more likely to happen if you have frequently paid on time in the past, but it’s certainly worth a shot.

If you’re not able to make your rent on time, for example, let your landlord know as soon as possible. Yes, he or she may get upset, but if you let them know in advance and you pay them as soon as you can, everything will be fine, especially if you’ve always been a good tenant.

You may also want to consider borrowing money from family or friends if you need money for a short time. However, keep in mind that this could put a strain on your relationship if you’re not able to pay them back on time, but it may be a good option if you have nowhere else to turn.

Another option is to come up with a way to earn some extra money. Consider selling items that you have around the house (books, music, clothes, collectibles, etc.) This can very easily be done online, and it can really help you out of a tight spot, depending on what you have to sell.

You could also ask your boss if it’s possible to work some extra hours to make more money. They may not have any additional work for you to do, but it’s certainly worth a shot. It’s also a good idea to think about other ways to earn extra money. For instance, you may want to pick up a “side hustle” to help balance your budget. Think of what you can do and then find someone who will pay you to do it. There are numerous websites and apps out there designed exactly for this purpose.

Resolving Debt Trouble

As mentioned, paying for your monthly expenses with a payday loan (or any other type of loan) doesn’t solve your underlying debt problem. All it does is delay the issue until later. To really put yourself in a stronger financial position, you’ll need to work on resolving your money problems.

This often starts by making a budget and sticking to it. Not only will this help you make ends meet, but it will also help you foresee a potential money problem early enough that you can take steps to solve it before you reach the point where a payday loan is your only hope. Sticking to a budget will also help you build up an emergency fund, which you can use when life throws something unexpected your way.

If you find that you can’t afford all of your expenses on your current income, you’ll need to make some changes. Look at your budget and see where you can make some cuts. You’ll likely need to sacrifice a few things to make ends meet.

If you’ve already reviewed your budget, cut everything you can, and you’re still struggling with debt, it might be time to speak with a Licensed Insolvency Trustee. Contact us today to arrange for a free consultation. A Licensed Insolvency Trustee will be able to review your situation and let you know what debt relief options are available to you.