Payday loans are highly accessible thanks to their easy approval. They can provide you with the quick cash you need to cover a pressing expense without having to meet stringent loan criteria or wait days for the money that is typical of a traditional loan.
Payday loans are also super expensive and can be tough to repay on time because of their short repayment terms. For this reason, you may want to look into payday loan alternatives that can still get you the money you need quickly without sky-high interest rates and extremely short repayment due dates.
Key Points
- Payday loans are expensive and can be difficult to repay due to their short repayment terms.
- Alternatives to payday loans should be considered first to avoid the exorbitant interest rates and risk of drowning in a payday loan cycle.
- Personal loans and credit card cash advances may be less expensive and less stressful ways to borrow extra cash as an alternative to a payday loan.
Why Payday Loans Can Be Harmful
Before we look at some alternatives to payday loans, let’s understand why payday loans can be potentially dangerous.
High Costs
The interest rates charged on payday loans are very high. They can be so high that they make these loans extremely expensive and nearly impossible to repay by their due date. The APR on a payday loan can be as high as 443%, depending on where you live, as different provinces have their own payday loan rate maximums.
Hard To Pay Back
Just about anyone with a bank account can get their hands on a payday loan, but not everyone will necessarily be able to repay the loan amount, plus interest. When the interest amount is tacked onto the original loan amount, the total number can be difficult to repay.
Repayment terms can be as short as two weeks, which means you’ll need to pay the full loan amount, plus interest, by the time you get your next paycheque. If you can’t come up with the money within this very short time, you could face consequences, including extra fees or even collection calls.
Payday Loan Cycle
If you’re unable to repay the payday loan when it’s due, or you find yourself regularly in need of extra money, you may find yourself needing to borrow again. This could put you at risk of getting stuck in a seemingly endless payday loan cycle.
Most provinces do not allow “rollover” loans — which involves rolling any outstanding payday loan balance into another loan. However, some borrowers may seek another payday lender for another loan to pay back what they already owe on their existing loan. As such, the amount you need to borrow can incrementally increase, trapping you in a financial hole that you may not be able to get out of without outside intervention.
Predatory In Nature
Many payday lenders out there prey upon borrowers who they know may not be able to repay what they owe, resulting in additional fees charged. Borrowers need to be on the lookout for these types of lenders, who will approve anyone for a loan, regardless of their credit or financial status.
Payday Loan Alternatives
Rather than put yourself at risk with a payday loan, consider other options when extra funds are required.
Personal Loans
A personal loan provides a lump sum of money that must be repaid in installment payments over a set term. These types of loans tend to have relatively quick approval times, lower interest rates, and longer repayment terms compared to payday loans. Since you have a much longer amount of time to repay your loan, the repayment schedule is much less stressful and more achievable.
Having good credit is often a requirement for personal loans, while payday loan lenders don’t usually require good credit or conduct a credit check at all. That said, you may still be able to access a personal loan with bad credit, as many alternative lenders cater to bad credit borrowers. That said, you might pay higher interest if your credit score is low.
Borrow Up To $50,000
Secured Loans
If you have an issue obtaining an unsecured loan and have an asset that can be used as collateral, consider getting a secured loan. You may have an easier time getting approved for a secured loan because of the reduced risk for the lender. That also means a potentially lower interest rate.
Credit Card Cash Advances
If your emergency expense can be covered by a credit card, this may be a great alternative to a payday loan. Even though credit card rates are quite high, they’re usually still lower than payday loan rates.
If you can’t use credit, a cash advance from your credit card is another option. While there is a hefty fee for using a cash advance, it’s a small price to pay for the convenience of cash.
Just remember that interest starts to accrue on a cash advance the day you make the withdrawal. Even though you have a longer amount of time to repay the debt, don’t wait too long because interest can build up quickly.
Applying With A Credit Union
Credit unions are known for offering affordable interest rates on their loans. These institutions tend to consider additional approval factors on top of credit scores as well. Keep in mind that you’ll first need to become a member of the credit union in order to apply for a loan.
Borrowing From Friends And Family
Some of your friends and family may be willing to help you with your short-term financial problems. The benefit of borrowing from friends and family is there won’t be any interest. However, if you don’t repay the funds, you run the risk of sabotaging your relationships, so only take this route if you’re able and willing to pay back the money you owe as promised.
Emergency Funds
An emergency fund is designed specifically for situations where money is urgently required. If you’re in a desperate financial predicament, you can tap into this account rather than resorting to an expensive payday loan. If you don’t have an emergency fund, learn from this experience and build one for future financial emergencies.
Paycheque Advance Or Extra Hours
Many employers are completely understanding of emergencies and may be willing to help you out with an advance in pay. Alternatively, you can ask your boss for extra hours to make more money, or if your issue is not time-sensitive, consider finding a side job for extra cash.
Overdraft Protection
Overdraft protection is a service that your bank provides that lets you take out more money from your bank account than what’s currently in it. For example, if your account has $500 and you take out $600, your overdraft protection service will allow you to take out that extra $100 without charging you a non-sufficient funds (NSF) fee. If you’re writing a cheque, it will clear, even if your account technically does not have enough funds in it.
Taking advantage of this service can be advantageous in the event of an emergency. The money is available immediately without having to go through a loan application process. Just keep in mind that your bank will charge you a fee for overdraft protection. Plus, you may need good credit to be eligible.
Government Financial Assistance
Your provincial government may offer some form of financial assistance if you qualify. For instance, there are programs available for low-income earners and students who may need some financial support. These services are free, and the funds provided will not add to your debt.
Consider Getting Credit Counselling
A credit counsellor can help you adopt healthy financial habits. Credit counselling can help you budget, create a debt repayment plan, and control spending among many other things. A credit counsellor can also help you get through short-term financial hiccups such as a financial emergency.
Are There Any Low-Interest Payday Loans Available In Canada?
One of the key features of a payday loan is its high interest rates. Depending on the province you live in, it can cost between $14 to $17 per $100 you borrow. That’s equivalent to 365.0% to 443.21% APR.
However, in Quebec, payday lenders can only charge an annual rate of 35%. This rate makes it unprofitable for payday lenders to operate in Quebec, so it can be difficult to find one.
Thankfully, there are alternatives to payday loans. Instead of looking for a low-interest payday loan, you can try using an alternative form of financing, as we’ve listed above.
When Are Payday Loans A Good Idea?
If you’ve explored all of your other options and none of them will work, considering a payday loan might be your option of last resort. This should only be considered if you’re in a true financial emergency.
Before proceeding with a payday loan, ensure that you understand the terms and conditions completely. Interest rates, due dates, and other fees are very important to analyze when it comes to payday loans. If you aren’t crystal clear on the loan’s structure, you may run into worse financial trouble or cycle into debt.
Final Thoughts
Financial trouble happens to the best of us. Do what you can to handle the situation effectively without turning to payday loans. If you need to use a payday loan, be sure to pay it on time and in full to avoid worse repercussions. But, if you’re looking for an affordable and effective alternative to a payday loan, several alternative options are available, including personal loans and credit card cash advances.
Payday Loan FAQs
How much can I borrow through a payday loan?
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