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While payday loans can sometimes be helpful when you’re in dire need of a solution to your financial problems, they can also seriously damage your bank account, whether you’re living in St. John’s or anywhere else in Newfoundland and Labrador. Not only do they come with very high-interest rates, but there are also so few situations where they would actually be beneficial that it’s probably better to avoid them altogether.
Then again, why are payday loans so risky? How can they help you, but cause so much financial damage at the same time?
More interested in a traditional loan in St. John’s? Check this out.
How Does a Payday Loan Compare to a Personal Loan?
When looking for financial solutions in St. John’s, chances are you heard about personal loans, common loan products which you can apply for through almost any lender in St.John’s. Loan amounts can range anywhere from a few hundred dollars to upwards of $30,000. Generally speaking, you’re also able to negotiate with your lender to arrange a payment plan, allowing you to pay back the loan over several months (sometimes years) through installments with interest, making it more affordable. Your approval will hinge on elements such as your:
- Credit health
- Debt and payment histories
- Monthly/yearly income
- Employment record
- Ability to offer a cosigner or collateral
- Lender’s borrowing policies
On the other hand, payday loans come in relatively small amounts ($1,500 or less) and are meant to be paid back within a very short term; 14-days following approval, the time a typical paycheck takes to arrive. At first glance, payday loans are relatively appealing because:
- Same-day approval is common
- No credit check will be performed
- Bad credit (if that’s the case) is not a problem
- An active chequing account, a St. John’s address, and a viable source of employment are the only conditions for approval
However, unlike a traditional personal loan:
- The 14-day payment schedule is usually non-negotiable. If you miss your designated payment date, you will be subject to a sizeable penalty charge.
- The maximum allowable interest rate for a payday loan in Newfoundland and Labrador remains at 60% ($60 per $100 borrowed), whereas most other provinces have managed to limit their maximum rates to 25% or under.
- Payday loans come with many hidden fees that drive their price up.
- In Newfoundland and Labrador, payday loan lenders are legally allowed to offer “rollovers”, which allow a borrower to apply for a second loan before their first balance is paid in full.
Payday loans in St. John’s may only be useful under these kinds of circumstances:
- When you have terrible credit and can’t get approved for other kinds of loans
- When you can’t or don’t want to borrow from friends or family
- When you have no credit cards or savings available
- When you can’t find a guarantor
- When your assets aren’t valuable enough to offer as collateral
- When you don’t have a vehicle title to offer for a traditional loan
- When you have no home equity and can’t secure a home equity loan or HELOC (home equity line of credit)
Wondering how to get a guarantor loan in Canada? Find out here.
The Curse of the Payday Loan Cycle
As we mentioned, payday loan rollovers are one of the leading causes of the payday loan cycle for unsuspecting St. John’s borrowers. Not sure what we mean? Here’s a timeline so you’ll have a better understanding of what we’re talking about:
- You apply for a payday loan
- Additional fees and high-interest rates apply, making the loan very expensive
- 14 days following approval, you must pay all costs or suffer a penalty
- Because of your other expenses, your paycheck doesn’t support these costs
- You end up defaulting and a penalty charge applies
- Your lender offers the rollover option
- Due to all the fees, rates, and your other expenses, the process repeats itself
- You end up in a cycle of debt that lasts for months, maybe even years
Take a look at this infographic to learn more about the payday loan cycle.
What’s Worse? Missing a Payment or Getting a Payday Loan?
We know what you’re thinking. Missing a payment for your personal loan or other credit product must also come with some type of penalty. Surely getting a payday loan must be a better idea in that respect, right? While it is true that being late, short, or skipping a payment for any financial product is bad for your credit and finances, the problem with payday loans is, again, that their terms are often non-negotiable.
Click here to find out how your payment history affects your credit score.
Let’s say, for the sake of argument, that you do qualify for a traditional loan in St. John’s. You’ve been a responsible borrower so far, but due to unexpected circumstances, you miss a payment or you can’t afford your balance by the agreed-upon due date. You probably will have to pay a penalty fee, maybe added interest for the unpaid amount. However, unlike with a payday loan, traditional loan lenders are often open to negotiation. If you can prove that this was a one-time mistake and that you can make payments properly, they may agree to waive the penalty. At the very least, you can always ask to reduce your payment amounts by extending your payment period over a few more months.
Here’s how to avoid being rejected for a loan.
The same goes for your credit cards, only they can be even more beneficial because you’ll have the option of making a minimum monthly payment to avoid penalties. Even if you miss a payment, the same negotiation tactics should apply, as long as you can convince your credit card company that this behaviour would not continue.
How to Spot a Payday Loan Scam in St. John’s
Unfortunately, being that Newfoundland and Labrador’s payday loan rules are a bit more lose than other parts of Canada, it can be a bit tougher to identify illegal operations and scam artists posing as legal lenders in St. John’s. Usually, tell-tale warning signs would include a “lender” charging you more than 25% interest or offering you a rollover. However, in this case, you’ll have to be extra cautious. Watch out for things like:
The “Cooling Off” Period
Thankfully, one regulation that has been imposed upon payday loans in St. John’s is the “cooling off” period. Once you apply and are approved for a payday loan, every lender in St. John’s is legally required to give you a grace period of 2 full business days. If you wish, you can cancel your loan during this time, without any sort of penalty charge against you. If the “lender” does not offer this option or refuses to let you cancel your loan within this period, it’s a sign that they’re trying to scam you. Walk away, report them to the St. John’s authorities and, if necessary, request that your banking information is changed.
You should also be wary of loan insurance scams.
Advertising
No matter where you are in Canada, one thing is clear when it comes to payday loans. Lenders are legally obligated to tell you exactly how much your loan will cost, as well as inform you about any other necessary terms and details. These details must be present within their advertising, which must be clearly visible at physical or online payday loan locations. They must also dictate such details within their loan contracts. If this isn’t the case for your lender in St. John’s, stay away from them.
Sales Representatives
Remember, scam artists are clever and will try to convince you that you need a payday loan, even when you don’t. While the same sort of thing can be said about any salesperson, don’t jump the gun when your personal and financial information is on the line. Pay attention to the way your sales representative speaks, acts, moves. They may attempt to manipulate you, even force you into taking their deal. If you can see that they’re being overly friendly, pushy, or won’t answer your questions properly, it’s once again time to walk away and let the authorities deal with them.
Looking For An Alternative to Payday Loans in St. John’s?
While payday loans might work out in some dire situations, they can be seriously harmful to your credit and finances. Loans Canada can help you avoid that kind of damage and connect you with a personal loan lender in St. John’s that understands your financial needs.
