Debt Relief For Payday Loans

Debt Relief For Payday Loans

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated November 3, 2021

The controversy over the use of payday loans seems like a never-ending one, just as the cycle of debt can be when a borrower becomes financially desperate enough to fall into the payday loan trap. Every day, all across Canada, people are preyed upon by payday loan lenders, who use their desperation to turn a large profit, all the while ruining whatever little financial health the victim has left. In fact, many places in Canada are trying to outlaw the use and sale of payday loans because of the lasting financial impact they can have on consumers.

This is a problem that the Loans Canada Team frequently sees among our current and potential clients. Someone has found themselves trapped in a cycle of revolving payday loan debt, with seemingly no way out except to live under crushing debt for months, maybe years, or declaring bankruptcy. But, what other options does that person have? Here’s our advice.

Check out this other article to see why Google banned payday loan ads.

Why Are Payday Loans So Hazardous?

Before moving on to debt-relief options, it’s important to understand exactly what payday loans are and why they can be so hazardous to your finances. First off, how a payday loan tends to work is mentioned right in the name. The cycle starts when someone is having trouble affording something important to them. Their car payments, their rent, groceries, whatever general expense that they have a limited time to pay. They need cash quickly, so they opt for a payday loan instead of an alternative like a credit card, personal, or private loan. Once they’ve taken out the loan, they will have until their next payday to cover the full balance, usually two weeks, in accordance with a typical bi-weekly paycheck.

Here’s the problem. That payday loan will likely come with an enormous interest rate (typically an APR of just slightly under 500%), one that many borrowers don’t take into consideration because of their need for quick cash. Their paycheck comes, but with tax deductions, it’s not enough to pay the full sum of that loan. That’s when the cycle starts and sometimes doesn’t stop. Many borrowers often find it extremely difficult to afford to repay the full loan amount, interest charges, and fees, and before they know it, they’re trapped.

How to Break The Payday Loan Cycle

Ways to Relieve Payday Loan Debt

If you’re considering opting for a payday loan to resolve your financial issues, we urge you to reconsider. There are countless other options to choose from to help you deal with your financial troubles that are not only safer but will help you get out of debt faster so that you can get back on track.

If you are currently suffering because of the debt caused by the payday loan cycle, the good news is there are several options available to you to help break the cycle and improve your financial situation.  

Talk to a Professional

The first step you should take, even if you’ve just started to feel that your payday loan debt is about to get out of control, is to talk to a financial advisor or a credit counselling agency. One of the many problems with payday loans is that because they are generally for a relatively “small” amount, likely $1500 or less, people will try to deal with the debt on their own. Seeking the help of a professional advisor is a good step as they’ll be able to provide you with other options, many that you might not have even thought of, other than declaring bankruptcy or staying in debt for what could be a very long time.

Pay Off Your Debt Immediately However You Can

The simplest and most effective way of dealing with your payday loan debt? Paying it off immediately. Do whatever you must to pay the debt back in full, because the consequences of your bank account being drained until your next paycheck will likely be far less harmful to your finances and credit than getting stuck in the revolving cycle of payday loan debt. Work extra hours, cut down on all other unnecessary expenses, and save everything you can.

Debt Consolidation

One of the key differences between debt consolidation and the next option, a debt management program, is that it will have no effect on your overall credit rating. Here, you’ll group your payday loan debt together with any other unsecured debts you might have. Then you’ll make one, more affordable monthly payment to pay off the total amount of your debts. True, you’ll be using another loan here, but at the very least, the interest charges involved will be far lower than those of a payday loan.

Enroll in a Debt Management Program

This option is usually for those with a really bad case of debt, which can happen after getting stuck in the cycle of payday loans. After speaking to a professional credit counsellor, one of the viable options you’ll be offered is to enroll in a debt management program. That counsellor will then work with you and help you manage your debt, negotiating with your creditors, and working out a payment schedule for monthly installments to be paid over the course of 4-5 years, rather than all at once as you would have to with a typical payday loan. The problem with this option is that, like debt consolidation, a debt management program is not a legally binding process, which means your payday loan lenders do not have to agree to it. Also, after your debts are paid completely, a record of a D.M.P. will remain on your credit report for 3 years, and your credit rating will switch to an R-7 rating.

Read this to learn about the types of debt you can consolidate with a debt management program.

Consumer Proposal

With this option, you’ll need to hire a Licensed Insolvency Trustee, someone who is regulated by the Superintendent of Bankruptcy Canada and is professionally trained to deal with bankruptcy and consumer proposal cases. Firstly, you can get a free consultation with them. They’ll assess your current debt situation and review all the possible options for dealing with it. If you decide a consumer proposal is the best solution, the trustee will contact the payday loan lender and whatever other creditors you might be involved with, then negotiate with them for you. Your debts and the interest charges with them will then be frozen and you’ll be able to pay them in monthly installments through the insolvency trustee. This is a far better alternative to declaring bankruptcy but be forewarned that you will need to pay a standard fee for their services, and your debts will have to be paid over a maximum period of 5 years.  

For the differences between a consumer proposal and a DMP, read this.

Declare Bankruptcy

This should only be considered as a last resort because of the negative effects it will have on both your finances in general and more specifically your credit. Once again, you’ll need to hire an insolvency trustee in order to file for bankruptcy. Yes, your debts will be taken care of, but your credit will be negatively affected for a minimum of 6 years as a result. In fact, a “black mark” will appear on your credit report for that time, which will significantly affect your ability to secure a loan until that mark is removed. Lenders, creditors, and anyone else who reviews your credit before deciding to provide you with a service, landlords thinking about renting to you, for instance, will likely not want to help someone who’s not only had a history of bankruptcy but could be a bankruptcy risk in the future.

Learn how to avoid bankruptcy here.  

Dealing with Your Payday Loan Debt Issues as Soon as Possible

As we mentioned earlier, 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, we’re aware that this is not always an option for everyone. After all, financial situations vary from person to person. However, while a payday loan might start off as a small amount, with their extremely high-interest charges and other such circumstances, the debt that follows can get out of control quickly. Because of this, 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.

Looking For Debt Relief Help or Payday Loan Alternatives?

Just remember, at Loans Canada we can offer a variety of debt management options and payday loans alternatives to help with whatever financial struggles your may be going through.

Rating of 5/5 based on 1 vote.

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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