How Payday Lenders Prey Upon the Poor

While Canada’s wages are relatively high compared to many other places in the world, many consumers still struggle to keep up with their financial obligations. Whether it’s due to unpaid debts, loss of employment or the generally high cost of living in many urban areas, finding the right solution can be difficult.

Unfortunately, this exact situation is what often traps consumers into the payday loan cycle of debt. When it comes to dealing with an unexpected expense or even daily expenses, payday loans can seem like the right choice. But in reality, they often make financial issues worst.

What Are Payday Loans?

Most payday loans are small, generally only $100 – $1,500 and you’ll come across many alternative lenders that provide them in almost every province and territory in the country. Typically, the loan is deposited as a single lump sum directly into your bank account within 24 hours of its approval.

Once you obtain the money, you will have a maximum of 14 calendar days to repay the lender. In most cases, the full loan sum, plus any interest and fees will be automatically debited from your account upon the designated due date. 

Check out these alternatives to payday loans. 

Sounds easy, doesn’t it? While payday loans can be very appealing, especially when you’re experiencing a financial crisis, they are responsible for massive amounts of consumer debt across North America. Let’s find out why. 

Why Do People Use Payday Loans?

As mentioned, the majority of people who apply for payday loans are doing so because they’re in the middle of a financial emergency and need access to a few hundred dollars of fast cash. Those emergencies can include but certainly aren’t limited to:

• Lack of rent or mortgage payments
• No groceries or other essential supplies
• Reduced work hours, wage, or total loss of employment
• An injury or incident that prevents any work
• Vehicle-related problems (accidents, repossessions, etc.)
• Home-related problems (repairs, disasters, etc.)
• Bad credit or other issues that block access to traditional credit products 

Another reason why consumers apply for payday loans is that they are very easy to get approved for, even with bad credit, compared to most other credit products in Canada. Unlike a bank loan or a credit card, the only documents you’ll need to acquire a payday loan are:

• Government I.D. (you must be the age of majority in your province/territory)
• A phone bill or other proof that you have a permanent Canadian address
• Your most recent bank statements 
• A recent pay stub or other proof that you have a job and a monthly income
• Your Social Insurance Number (SIN #)
• A pre-authorized debit form or VOID cheque

How Do Payday Lenders Prey Upon The Less Fortunate?

All things considered, payday loans appear beneficial on the surface. After all, a normal loan or credit card can be hard to qualify for and the application could take days to process, only to come back denied.

Enter the payday loan lender, where you can walk in off the street and, if all goes well, find the money in your bank account later that day (or by the next business day). Similar to most banks and credit unions these days, most payday lenders also have a website where you can easily apply.

Not to mention the fact that many less fortunate people are already dealing with bad credit, a low income, or a lot of debt, any of which can bar them from accessing regular credit products through a bank or other institution with higher approval standards. Actually, payday lenders snare many clients because they don’t check credit at all. 

Where The Problems Start

In the end, payday lenders offer a way to bypass these seemingly complicated and judgemental approval processes by granting borrowers cash loans with far fewer requirements. However, the real problems begin when the interest rate and service fees get tacked on to the final bill. 

Essentially, most payday lenders use the desperate nature of a poor person’s situation as an excuse to charge them rates that are 30 or 40 times higher than what they’d be charged at a normal financial institution (300% – 500% APR in most cases). Depending on your province or territory, this could equal $15 – $25 per $100 you borrow. That rate, coupled with their exorbitant fees for loan origination and other “services” rendered.

How Does A $500 Payday Loan Turn Into Thousands Of Dollars Of Debt?

Unfortunately, racking up hefty amounts of payday loan debt is all too easy, particularly for anyone that’s living paycheck-to-paycheck. Here’s how it can happen:

1. The borrower applies for a small loan of only $500 initially
2. Another unforeseen event occurs, draining whatever savings they have left
3. The due date rolls around and the lender goes to withdraw the final payment 
4. The payment, fees, and interest are too much for the borrower’s account
5. They’ll then be charged extra interest and a penalty for non-sufficient funds
6. The borrower is then forced to take out another loan to pay off their first
7. This goes on for months, costing the borrower thousands and ruining their credit 

If the borrower continues missing payments, the lender may even sell their overdue account to a debt collection agency, which can lead to a whole new range of financial problems, such as harassment, wage garnishment, and eventually bankruptcy.

This is commonly known as the payday loan cycle and is a particular problem in the provinces and territories where “rollovers” are still permitted (when a lender allows you to take on an additional loan to cover the cost of your first one). The whole process is very hard for the government to regulate, so many payday lenders slip through the cracks.

Luckily, many areas in Canada now have rules that limit the damage caused by payday loans. For instance, all provinces now have maximum rates that payday lenders can charge and borrowers must be given a two-day period during which they can cancel their loan. In addition, rollovers, wage transfer forms, and unruly payment collection techniques are illegal in:

• Alberta
• British Columbia
• New Brunswick 
• Nova Scotia
• Ontario
• Saskatchewan 

What Are Some Alternatives To Payday Loans?

Now that you know how easy it is to fall into the payday loan cycle, let’s talk about some of the ways you can avoid it altogether. After all, payday loans should only be used as a last resort. Anyone who wants to prevent further financial problems will be better off looking into safer alternatives, such as:

• Personal Installment Loan – This is also a lump sum of money, only you would apply for it via a bank, credit union, or private lender. While some personal loans are harder to get approved for, they usually come in larger amounts and have much lower rates than payday loans. (Check out the difference between a personal loan and a payday loan). Additionally, you can pay the loan off in divided installments and good payments will gradually elevate your credit score. 

• Credit Union – If bank restrictions are too tight, you can try opening an account with a credit union, where there’s a bit more leeway because your membership also means you’re a co-owner. Here, it should be less difficult to acquire a small loan with a competitive rate, which you can use to slowly improve your finances. 

• Credit Counselling – Your financial problems may simply stem from poor spending habits or lack of a budget. In that case, credit counselling courses can make a world of difference. If your situation is more serious, a credit counsellor can also help you negotiate with creditors, find a debt consolidation loan, or enter a debt management program. If necessary, they can even put you in contact with a Licensed Insolvency Trustee so you can file a consumer proposal or declare bankruptcy.

Don’t Want To Get Caught In The Payday Loan Cycle?

Avoid getting stuck in the payday loan cycle of debt, Loans Canada can help match you with an alternative option that meets your unique financial needs.