Many Canadians with bad credit in need of extra funds seek out payday loans. In fact, according to the Canadian Bankers Association, around 4.52% of Canadians have used payday loans. That’s more than 1.5 million Canadians. As helpful as payday loans may seem over the short term, they can add to the debt pile and be very difficult to repay. Many are left seeking out payday loan debt relief solutions to help them get out of debt.
If you’re stuck in a payday loan debt cycle, read on to find out what you can do.
Key Points
- Payday loans are small, short-term loans that come with extremely high interest rates, making them a very expensive way to borrow money
- If you can’t repay your payday loan on time, you run the risk of getting yourself into a dreaded payday loan debt cycle.
- If you’re in the midst of a payday loan cycle already, you may have to seek payday loan debt relief solutions, like working with a credit counsellor or Licensed Insolvency Trustee (LIT) to help.
How To Stop The Payday Loan Debt Cycle
If you’re stuck in the payday loan debt cycle, your first step should be to reduce your reliance before things get out of hand. You should eliminate your reliance on payday loans as much as possible, if not completely. Here are a few steps you should take to avoid a seemingly endless cycle of payday loan debt:
Don’t Apply For New Payday Loans
Instead of taking out a payday loan to make ends meet or to repay a prior payday loan, consider other alternatives. For instance, try making extra money through side hustles, like using your car for advertising, becoming a ride-share driver, or even renting your car out to others.
The goal is to make as much money as you can to cover whatever pressing expense you have without resorting to small, short-term, very expensive payday loans that are very difficult to repay.
Pinpoint And Fix Your Financial Issues
If your money issues stem from overspending or having a poor handle on personal finances, then some simple changes in your financial habits may be all that’s needed. Your first step is to make a budget to help you visualize where all your money goes each month and help you see where you can start saving.
You can create a budget manually, or you can access one of several budgeting apps, like YNAB and Mydoh, to simplify the process.
Start Paying Down Your Debts
With a new budget in place, you can work on putting any extra money toward paying down your payday loan debt. Do whatever you must to pay the debt back in full. The consequences of your bank account being drained until your next paycheque will likely be far less harmful to your finances and credit than getting stuck in the revolving cycle of payday loan debt.
There are a few debt repayment approaches you can take to pay down your debt:
- Snowball Method — With this method, you pay off the smallest debts first, then use the funds from there to pay off the next loan, and so forth.
- Avalanche Method — With this method, you start by paying off the loan with the highest interest rate first. Then, once that’s paid off, you continue with the next-highest rate debt, and so forth.
Payday Loan Debt Relief Options
If you’re already dealing with a payday loan debt cycle that you feel you can’t get out of, consider the following options.
Negotiate Your Payments With Your Lender
Consider reaching out to your payday lender and asking if they’d be willing to renegotiate your payday loan. If you feel that you won’t be able to make your payment before the due date, your best bet is to speak with the payday lender right away before the payment is missed.
Before doing so, crunch the numbers to determine how much you’ll be able to pay on your loan every month, and ask the lender if there’s a way to work with what you’re able to do. While many lenders may still demand repayment in full according to the original contract, some may be willing to accommodate you.
Speak To A Credit Counsellor
If you feel that your payday loan debt is about to get out of control and you’re unable to get out of debt on your own, it’s time to talk to a financial advisor or a credit counselling agency. A professional will be able to provide you with the best payday loan debt relief solution based on your particular situation.
A credit counsellor will usually start by assessing your income, debt, savings, and spending. If your debt isn’t too out of control, a simple budget may help you. On the other hand, if your debt is severe, you might require more extreme solutions like a debt consolidation program or consumer proposal.
Best Debt Relief Agencies
Several agencies are available to help you deal with your mounting debt, including the following:
| 4Pillars | Learn More |
| Consolidated Credit | Learn More |
| BDO First Call | Learn More |
| Raymond Chabot | Learn More |
Consolidate Your Payday Loans
A debt consolidation loan allows you to consolidate all your debts so that you only have one loan with one payment. The goal is to get approved for a large enough loan with a more affordable interest rate. This way, you’ll save money on interest and only have one monthly payment to manage.
Remember, most personal loans used to consolidate debt require good credit to get approved. If you have poor credit, you may need to get a cosigner to improve your chances of approval.
If you’re a homeowner, you could use a home equity loan to consolidate your payday loan debt. This can be easier to qualify for even if you have poor credit due to the house acting as collateral.
Find Providers in Your Area
Enroll In A Debt Management Program (DMP)
After speaking to a professional credit counsellor, one of the options you may be offered is a debt management program.
A DMP involves negotiating a new debt payment plan with your creditors over the course of 2 to 5 years. The only real problem with this option is that a debt management program is not a legally binding process. This means your payday loan lenders do not have to agree to it.
Moreover, after your debts are paid, a record of a DMP. will remain on your credit report for 2 years after completion, and your credit rating will switch to an R-7 rating. This can hurt your credit score and your chances of accessing credit in the future until this note falls off your report and you start to rebuild your credit.
File A Consumer Proposal
If your payday lenders or other creditors refuse your DMP proposal, another option you have is to file a consumer proposal. With this option, you’ll need to hire a Licensed Insolvency Trustee (LIT). These are professionals regulated by the Superintendent of Bankruptcy Canada and are trained to deal with bankruptcy and consumer proposal cases.
Consumer proposals are legally binding and involve your LIT negotiating a payment plan with your payday lenders and other creditors that you owe money to. If your creditors agree to your proposal, you may be able to only repay a percentage of your debts. This is generally a better solution than bankruptcy, as you won’t lose your assets like your home or car.
However, you will need to pay a standard fee for their services, and you’ll receive a negative remark on your credit report, which will hurt your credit score.
Declare Bankruptcy
Bankruptcy is a last resort solution to payday loan debt. If your consumer proposal is not accepted, then you can opt for bankruptcy. Once again, you’ll need to hire an insolvency trustee in order to file for bankruptcy.
With bankruptcy, you’ll be required to make payments for 9 months, or even longer if you’re required to make surplus payments. While your payday loan debts may be resolved with bankruptcy, you’ll receive an R9 rating on your credit report, which will remain on your credit report for 6 to 7 years and significantly impact your credit score.
What Happens If You Don’t Pay Back Your Payday Loan?
If you fail to make your payday loan repayment on time, your lender will take steps to recoup their funds, including the following:
They’ll Reach Out To You
Your lender will contact you to find out why the repayment was not made on the due date. They will also likely try to notify you of the potential consequences of failing to pay.
Now would be a good time to make up for your missed payment before too much time lapses. Your lender may also likely charge you a late payment fee and interest on the outstanding balance.
They May Try To Withdraw The Money
When you first take out a payday loan, you may have authorized the lender to deposit the funds directly into your bank account. In much the same way that the lender deposited the funds, they could try to withdraw the money that is owed to them. If there’s not enough money in your account to fully cover the payment, the lender may try to withdraw a little at a time until they get back the full amount owed.
That said, there are rules surrounding what lenders can do when it comes to withdrawing funds from a borrower’s account. In Ontario, for instance, lenders can’t repeatedly attempt to withdraw funds from a bank account if the bank charges fees every time.
They May Send Your Account To Collections
If the lender is unsuccessful at getting you to pay up, they may enlist the services of a collection agency to recoup the funds. Keep in mind that lenders and collection agencies must adhere to the rules of each province’s Office of Consumer Affairs when it comes to how they contact you. In a nutshell, they’re not allowed to harass you with seemingly unending phone calls.
They May Sue You For Unpaid Funds
If the lender’s attempts to get you to pay your debt back don’t work, they can take you to court. The lender can sue to have your wages garnished until the outstanding loan is paid off.
What Makes Payday Loans Hard To Pay Off?
When you take out a payday loan, you’ll have until your next payday to cover the full balance, usually two weeks.
But here’s the problem: payday loans come with very high interest rates (APRs range between 400% to 600%), which many borrowers don’t take into consideration because of their need for quick cash.
Unfortunately, once the payment due date arrives, many borrowers are unable to pay it back due to their usual monthly obligations and lack of savings. Borrowers end up incurring more interest charges and fees, which makes it harder to pay off. That’s when the cycle starts and sometimes doesn’t stop.
When Should You Seek Help For Your Debt Problems?
Payday loans are generally going to be for a small amount, so paying them off using whatever money you can gather is likely the easiest way of breaking the cycle. However, this is not always an option for everyone. After all, financial situations vary from person to person.
It’s best to get a jump start on the process and talk to a financial advisor or credit counsellor before the situation worsens and bankruptcy comes within the realm of possibilities.
Bottom Line
The best way to put a stop to your payday loan debt cycle is to avoid it in the first place. But if you’re already drowning in debt, you may want to seek the guidance of a professional for advice on payday loan debt relief options. Just make sure to consider all your options, as some may have negative effects on your credit health.
