Thanks to government intervention and the creation of tougher and stricter laws and regulations, payday loans in Canada have declined over the last decade, but that does not mean they are not always wreaking havoc to thousands of Canadians each year.
If you are unsure about the financial problems associated with a payday loan and are considering getting one, we encourage you to continue reading so you can make as informed a decision as possible.
What is a payday loan?
A payday loan is a short-term loan with an extremely high interest rate that must be repaid with the next payday of the borrower, hence the name. Payday loans are intended to serve a certain portion of the population that is not financially stable enough to be approved by a more traditional loan solution. Payday loans may seem like a great option for those who need a fast cash loan and who do not have the credit rating needed to apply to a bank, but the reality is that these types of loans are only beneficial for predatory lenders.
In recent years, the Government of Canada has cracked down on payday loans, which means that most provinces now have limits on what a lender can charge for a short-term loan. Since it is no longer profitable for these types of lenders to have their homes on the street, many payday loan companies have transferred their businesses online.
Online payday loans are everywhere (just need to do a Google search), anyone can access it the same day. Money cashed quickly with few or no requirements. Great, no? Especially when an unexpected expense occurs.
What are the requirements for getting a payday loan?
The approval rate for payday loans is very high, one of the reasons they are attractive. Unlike other financial products, to qualify for a payday loan, a consumer must only provide the following:
- Proof of income for the last 3 months
- Proof of address (electricity bill etc)
- Chequing account for automatic transfer and payments
If you meet these three requirements, you will be approved. Regarding the time it will take to get the money, if you apply online, you may have to wait up to a day to get your money, but if you apply in person, you will probably get it on the spot.
The cycle of payday loans
The payday loan cycle is one of the worst debt situations in which you could be. It can take months or even years to regain control of your finances and repay the accumulated debt. This cycle of indebtedness can occur when you find yourself in one of the following situations.
In the first situation, a borrower gets a loan to cover the cost of an unforeseen expense or to pay for something for which he does not have the money. After 2 weeks (next payday), he still does not have the money to repay the loan because of all the other expenses of life that have to be covered. The payday lender therefore suggests to lend another larger loan this time, to cover the first loan as well as to help with any other expenses that the borrower might have. Once this cycle starts, it can be very difficult to stop, as many borrowers continue to get new loans every 2 weeks for an extended period.
Fortunately, this is not happening as often as it used to be since the government made it illegal for lenders to refinance loans. This means that if someone can not afford to repay their first payday loan, the lender can not provide another one to cover the first one.
In the second situation, a borrower gets a loan to cover a specific cost and can repay the loan in full on his next payday after 2 weeks. The borrower is then offered a second payday loan. Generally, this second loan is more important because the lender sees that the borrower has been able to manage his or her first loan. This can often last as long as the borrower can continue to pay more and more expensive loans.
Alternatives to payday loans
Payday lenders tackle desperate people and make their loans extremely affordable with few requirements. Even though the payday lending industry uses the excuse of filling a market gap and helping those who can not borrow from other major financial institutions, the reality is that most payday loan companies lend money. to those who can not afford to pay a payday loan.
Borrowing money, by any means, when you can not afford it is never a good idea. But of course, we can not predict the future and under what circumstances you will need to borrow. This is the reason why payday loans are so attractive. The good news is that there are many other ways to borrow money without the negative effects of a payday loan.
Personal loans by installments
These types of loans are one of the best alternatives, more affordable than payday loans.
You can apply for a personal loan from a variety of lenders, whether in banks or at a private lender. The options are virtually endless, which means you’ll be able to find a loan that best suits your needs and lifestyle.
Depending on the lender you choose and the loan you are interested in, your interest rate and payments will vary. What makes a personal loan much more affordable than a payday loan is how to pay it back. Installment payments mean you will have more time to repay your loan and will not need to take out another loan to cover the cost of the first one.
Credit cards are an excellent financial tool if used properly and responsibly. They can facilitate large purchases and can be used as a form of short-term borrowing. That’s why they are a good alternative to payday loans. When it comes to using a credit card to buy something you can not pay in cash, it is important to be cautious because it is very easy to spend too much and accumulate a large debt.
The best way to use a credit card is to pay for something you can afford, either immediately or in the billing period of your credit card.
Line of credit
A line of credit is similar to a credit card in the sense that you can use your available limit, pay it back and use it again. A line of credit also has a minimum payment that must be made each month, but of course you can repay the full balance at any time. If you are thinking of getting a payday loan to cover the cost of a specific expense, for example, a car repair, we recommend that you first check with your bank if you qualify for a line of credit. When you apply for a line of credit, you are generally offered an interest rate that is not only lower than a payday loan, but also lower than your average credit card. This makes a line of credit one of the best ways to borrow larger amounts of money.
Home Equity Loan
If you own a home, using your equity to get a loan or line of credit is a more affordable alternative to a payday loan. Home equity loans or line of credit work in the same way as unsecured loans. In this case, you use the capital you have accumulated by repaying part of your mortgage to obtain additional financing. Since a home equity loan or line of credit is guaranteed by your home, you will usually be able to get a bigger loan.
It is important to note that if you need a loan as quickly as possible, this option is not necessarily your best option, as you will have to go through the approval process of the bank with which you took out your loan. mortgage.
Borrow from a friend or family member
It’s not always easy to ask someone you trust to borrow money, but it’s definitely a better idea than getting a payday loan. If you family borrowing money, it is always good to agree on all the details before the money is transferred. Consider the following:
- Do you have the financial capacity to repay the borrowed money within a reasonable time?
- Are you comfortable paying interest charges?
- How often and in what form will you make the payments?
- What happens if you can not make a payment on time or not at all?
- Will there be a written agreement?
Predatory practices of payday loans
The reputable lenders do some form of evaluation before approving or rejecting a candidate. Payday lenders do not perform any type of valuation and therefore, often lend to those who can not repay a loan.
Since payday loans can be predatory, if you choose to get one and understand the terms and conditions of your contract, the only thing you can do to help relieve your debt is to pay it back.
On the other hand, if you believe that you are forced to sign a contract that you do not understand, that you are lying about the terms of your loan or that you have the impression that a potential lender is trying to rip you off it is important to immediately contact the relevant authorities.
Payday Loans FAQ
How long does it take to pay back a payday loan?
A payday loan must be repaid in full, plus interest and applicable fees, to the next pay day of the borrower.
If I ask for a payday loan, what will be my interest rate?
The cost of a payday loan varies depending on the province where you live. For a two week payday loan of $ 100, here is what you will have to pay by province.
- Alberta $ 15
- British Columbia $ 23
- Saskatchewan $ 23
- Manitoba $ 17
- Ontario $ 18
- Quebec n / a
- New Brunswick n / a
- Nova Scotia $ 25
- Prince Edward Island $ 25
What do I need to get a payday loan?
- Proof of income for the last 3 months.
- Proof of address (an electricity bill is usually a good option).
- Chequing account for the automatic transfer of the loan and payments.
Where can I get a payday loan?
Payday lenders operate online or have their house on the street
Once approved, how can I get my money?
Depending on the payday lender you choose, your loan will automatically be transferred to your chequing account or you will receive a money order.
Loans and loans
Despite the fact that there are lenders who attack the poor, or those who feel they have limited options, it is important for you, the consumer, to make responsible borrowing decisions. Keep in mind that even if your past financial missteps haunt you, payday loans are not your only option.