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The Problem with Payday Loans

Why It’s A Good Idea to Avoid Payday Loans

Payday loans seem like a good option when you’re short on cash and looking to make ends meet. These short-term loans are quite easy to get (most don’t require a credit check) and there are payday lending locations in shopping malls and on retail strips in nearly every city and town in the country.

However, payday loans often lead to more problems than they solve.

Many people who look to payday lenders to help them “make it to pay day” and afford their bills sadly find themselves struggling to repay their loans. This leads to greater financial trouble and, potentially, significant debt problems.

Payday Loans Don’t Solve Root Problems

One of the main issues with payday loans is that they do not solve a person’s underlying financial problems. If you find yourself unable to make ends meet and you need to borrow money to afford your expenses and bills, you have a financial issue. Either you are not budgeting correctly, or you have been hit with an unexpected expense and you do not have an emergency fund.

In either of those situations, the problem is your financial situation. If you properly budget your money, and put money aside for emergencies, then you are not likely to end up running out of money before you get to pay day. A payday loan doesn’t solve this problem.

Taking out a payday loan only delays the issue at best. If you are short by $200, for instance, and you do not have the money available, you are likely living paycheque-to-paycheque. This means that everything you earn is already budgeted for and you don’t have anything left over. If this is the case, how will you have an extra $200 (plus interest) to repay the payday loan when it comes due? And, even if you do repay the loan on time, how will you make it to your next pay day without running out of money again now that you’re $200 short?

Payday loans can put you in a cycle of continuously owing money and continuously having to borrow money to “catch up.” They don’t solve your financial problems and, in some situations, they actually make them worse.

Payday Loans Often Make Debt Problems Worse

When you borrow money from a payday lender, the expectation is that you pay it back within a short period of time (generally two weeks). However, as mentioned, if you’re short on money and you can’t afford your expenses, it can be very tough to come up with the money you need in such a short time. If you’re not able to repay your loan in time, the lender will charge you additional interest and penalties on the loan. These costs add up very quickly. This is because payday lenders are legally able to charge very high rates of interest.

Payday Loans are Expensive

Payday lenders are able to charge much higher interest rates than nearly any other type of lender. This makes a payday loan one of the most expensive forms of consumer loans available. That in itself is a good reason to avoid getting a payday loan.

Numerous provinces and territories in Canada have laws in place that set the maximum cost of getting a payday loan. However, even with these laws in place, payday loans can still be incredibly costly. For instance, in Ontario, as of January 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, this will cost you $30. This may not seem like a lot but, remember, it’s often tough to repay a payday loan in just two weeks. Many people have difficulty repaying their loans in a short time period, which means that lenders are free to charge additional fees if you are late repaying your loan.

It’s also important to compare the cost of a payday loan to the cost of many other loans. If a payday lender charges $15 to borrow $100 for two weeks, this is an interest rate of 15% in two weeks, which equals a rate of 390% for the year! When you think about the fact that most credit cards charge somewhere in the neighborhood of about 20-25% per year, you can see how expensive it is to borrow money from a payday lender.

Of course, most people don’t plan on borrowing from a payday lender for an entire year, but – as mentioned – it can be tough to pay back your loan in time. While payday lenders are not able to provide “rollover loans” in Ontario (this means you can’t roll what you owe on a payday loan into a second payday loan) that doesn’t stop people from having trouble repaying their initial loan.

In addition, Ontario does not allow a payday lender to offer you another loan until the first loan has been repaid. However, there is nothing preventing a person from getting a second payday loan from another lender, using that money to repay their first loan, and ending up stuck in a cycle of debt that is difficult to pay down.

The high cost of payday loans mean that they should be one of your last options when you are looking for a loan. There are several other options that will lead to less financial trouble.

Alternatives to Payday Loans

Obviously, the best alterative to getting a payday loan is avoiding a situation where you need a payday loan in the first place. This can be done by budgeting your money and sticking to your budget. If you have a budget that accounts for all of your spending, you’re significantly less likely to wind up short on money before your next paycheque.

Another key aspect of avoiding payday loans is having an emergency fund. Life is unpredictable. Even if you budget extremely carefully and track every dollar that you spend, there is always the possibility of something unexpected happening. Your car might break down and you’ll need to do an expensive repair, for instance. If you don’t have an emergency fund, you’ll struggle to pay for this repair and you might wind up getting a payday loan so you can get your car fixed. It is a good financial strategy to try to plan for such situations by putting money aside in an emergency fund. You may have to sacrifice more and cut some aspects of your budget so that you can save for emergencies, but it will help you a great deal in the long run.

Of course, if you are in a situation where you need to borrow money to make ends meet, it’s not possible to go back in time and save more money to avoid the situation all together. If you need to borrow money, you should consider nearly every possible option before getting a payday loan.

  • Credit Cards
    • While, generally, taking on additional credit card debt is not advisable, doing so is a much better idea that getting a payday loan. If you are not able to pay back your credit card debt in time, you will be charged interest, but much less interest than if you got a loan from a payday lender.
  • Credit Card Cash Advances
    • A cash advance on a credit card costs more than a typical purchase. However, the interest rate on an advance is still lower than the rates on payday loans.
  • A Bank Loan
    • If you are able to get a small personal loan from your financial institution, this could be a more affordable way to borrow money than a payday loan.
  • Friends and Family
    • Borrowing from friends and family can be tricky. It can lead to awkward conversations, judgements, hurt feelings, and many other potential issues. However, it’s typically a better idea than a payday loan. However, if you borrow from a family member, make sure you have a plan to pay them back.

Whenever you borrow money, and whoever you borrow it from, it’s very important that you have a plan for how you will pay it off before you borrow. Having a plan will increase the likelihood of successfully paying back the loan on time and it will reduce stress and interest costs.

Another alternative to getting a payday loan is to talk to your creditors. If you’re unable to pay your bills at the moment, but believe that you will be able to in a couple of weeks, let your creditors know as soon as possible. Explain your situation and be honest. Credit card companies and other such lenders may reduce or waive late payment penalties if you have typically repaid your debts on time in the past. If you’re struggling to pay your rent, talk to your landlord and let them know that the situation is temporary and it will be resolved soon. They might get upset, but they’ll be okay as long as you do manage to pay them later on.

If you find yourself frequently struggling with money and debt, you don’t have to do it alone. There are options available to you. Contact a Licensed Insolvency Trustee to find out what you can do. Our team offers free consultations, so you can speak to us at no cost and learn about the different available options. Contact us today for more information.