Payday loans are pretty popular among Canadian consumers with poor credit. 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 be, 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, here’s what you can do.
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. You should eliminate your reliance on payday loans as much as possible, if not completely. Here are a few steps you should take:
Step 1. Do Not Take Out A New Payday
Instead of taking out a payday loan to make ends meet, consider other alternatives. You can try making extra money through TURO, Uber, Task Rabbit or even by selling items in your home.
You can also look into social programs and food banks around your city. It can help lower your grocery bills. For example, if you live in Toronto, you can book an appointment or drop in at The New Toronto Street Food Bank to get 2-3 days’ worth of food.
Step 2. Find Your Financial Issues
If your money issues stem from overspending or not knowing where it all goes then you need to make a budget. Seeing where all your money goes each month will help you see where you can start saving.
If your financial situation feels too overwhelming, you can contact a credit counselling agency. They can help you assess your situation and provide you with a budget that works for you.
Step 3. Start Paying Down Your Debts
With a new budget and support from various social programs, you can work on putting any extra money toward 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.
You can use the snowball or avalanche method.
- With the snowball method, you pay off the smallest debts first, then use the funds from there to pay off the next loan.
- With the avalanche method, you start by paying off the loan with the highest interest rate first.
Can You Negotiate Your Payments With Your Lender?
Yes, you’re free to renegotiate your payday loan with your lender. 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.
If possible, you may be able to renegotiate the payment terms of the loan to help make it easier for you to follow through with repayment.
Can You 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, and one interest rate to manage. 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 make.
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.
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Payday Loan Debt Relief Options
If you’re struggling with breaking the payday loan debt cycle, you should consider the following options to help get it under control.
Speak To A Credit Counsellor
If you feel that your payday loan debt is about to get out of control, it’s time to talk to a financial advisor or a credit counselling agency. Seeking the help of a professional advisor is a good step as they’ll be able to provide you with the best payday loan debt relief solution.
They’ll 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.
Enrolling 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 (aka debt consolidation 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 D.M.P. 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 chances of accessing credit in the future until you rebuild your credit.
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File A Consumer Proposal
If your payday lenders or other creditors refuse your DMP proposal, your next option would be to file a consumer proposal. With this option, you’ll need to hire a Licensed Insolvency Trustee. They 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 to who you owe money. Payment plans have a maximum term of 5 years and you’ll have to pay a percentage of your debts back (the actual percentage depends on your financial situation).
If your lenders and creditors accept your consumer proposal, you’ll be required to make payments for your new payment plan through the insolvency trustee. 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.
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 more if you’re required to make surplus payments. While all your debts, including your payday loan debts, will be absolved, you’ll receive an R9 rating which will remain on your credit report for 6-7 years. This can significantly affect your ability to access credit until that mark is removed.
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 won’t hesitate to 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 will also likely charge you a late payment fee and interest on the outstanding balance.
They’ll 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’ll 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.
The agency will use the phone number you provided to get in touch with you for payments. If they can’t get a hold of you, they may reach out to your friends, family members, or employer. If your loan is sent to collections, your credit score will likely take a hit.
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’ll Garnish Your Wages
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.
Here’s The Problem
Payday loans come with high-interest rates (APRs range between 400% – 600%), one that many borrowers don’t take into consideration because of their need for quick cash.
Unfortunately, once the payment due date arrives, many Canadians 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, we’re aware that this is not always an option for everyone. After all, financial situations vary from person to person. As such, 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 On Payday Loan Debt Relief
If you are currently suffering because of debt caused by the payday loan cycle. There is good news, you have options. Whether you’re in need of advice and budget, or a more drastic solution. For anyone dealing with high-interest debt, speaking to a professional is a great first step. They can provide support, helpful advice and ultimately understand what you’re going through.