The Loans Canada team sits down with Gary Schwartz of the Canadian Lenders Association to talk about open banking.
Online Payday Loans in Canada
Loans Canada: The Country's Best Loan Comparison Platform
Thanks to government intervention and the creation of more strict and serious laws and regulations, over the last decade, payday loans in Canada have become less prevalent, but this doesn’t mean they aren’t still wreaking havoc on the financial stability of hundreds of thousands of Canadians every year.
If you’re unsure of the financial issues associated with a payday loan or are currently considering taking one out, we urge you to continue to read so that you can make a decision that is as informed as possible.
What is a Payday Loan?
A payday loan is a short-term loan with an extremely high-interest rate that must be repaid by the borrower’s next payday, hence the name. Payday loans are meant to serve a certain section of the population who are not financially stable enough to get approved for a more traditional lending solution. While payday loans may sound like a great option for those who need access to a quick cash loan but don’t have the credit score needed to apply at a bank, in reality, these types of loans are only beneficial to the predatory lenders.
In recent years the Government of Canada has cracked down on payday lending which means that now most provinces have limits to how much a lender can charge for a short term loan. Since it is no longer profitable for these types of lenders to have brick and mortar stores, many payday loan companies have moved to the online loan world.
Online payday loans are everywhere (just do a quick Google search), anyone can have access to a same day, quick cash loan with little to no requirements. Sounds great, right? Especially if an unexpected expense has recently popped up.
What are the Requirements to get Approved for a Payday Loan?
The rate of approval for payday loans is very high, this is, of course, one of the reasons why they are so appealing. Unlike other loan and financial products, to qualify for a payday loan a consumer only needs to provide the following:
- Proof of income for the previous 3 months.
- Proof of address (a utility bill is usually a good option).
- Chequing account for the automatic transfer of loan and payments.
If you meet all three of the requirement you’ll be approved. Regarding how long it will take you to get the money, if you apply online you may need to wait up to one day to get your money but if you apply at a store you’ll likely get your money on the spot.
Check out our infographic on the payday loan cycle, here.
The Payday Loan Cycle
The payday loan cycle is one of the worst debt situations you can be in. It can take months if not years to regain control of your finances and pay down the debt that has accumulated from your payday loans. This cycle of debt can occur when you find yourself in either of the two following situations.
In the first situation, a borrower takes out a loan to cover the cost of an unexpected expense or to pay for something that they need but don’t have the money for. Once their two-week term is up (on their next payday), they still don’t have enough money to pay off the loan because of all the other necessary life costs they need to cover. Their payday lender then suggests that they take out another larger loan to cover the first and have some money left over to help out with any other bills they might have. Once this cycle starts it can be very difficult to end it, with many borrowers continuing to take out a new loan every two weeks for an extended period.
Fortunately, this situation doesn’t occur as much as if used to as the government has made it illegal for lenders to roll over loans. Meaning that if someone can’t afford to pay off their first payday loan the borrower can’t provide them with another one to cover the first.
In the second situation, a borrower takes out a loan to cover the cost of something specific and can repay the loan in full on their next payday when the two-week term is up. The borrower is then offered a second payday loan. Typically this second loan is larger because the lender sees that they were able to handle the first. This can often go on for as long as the borrower can continue to afford the increasingly more expensive loans.
Want to know the differences between personal, private, and payday loans in Canada? Click here.
Alternatives to Payday Loans
Payday lenders prey upon the desperate, they make their loans extremely accessible with very few requirements. While the payday loan industry’s excuse is that they’re filling a void in the market and helping those who are unable to borrow from other larger financial institutions, the reality is, most payday loan companies lend to those who can’t afford the cost of borrowing money with a payday loan.
Borrowing money, through any means, when you can’t afford it is never a good idea. But of course, we can never predict what is going to happen or if and when we’re going to need to borrow money. This is the exact reason why payday loans are so appealing. The good news is that there are many other ways to borrow the money you need without the negative effects of a payday loan.
Learn how to handle debt during a rough time in your life.
Personal Installment Loans
These types of loans are one of the best, and more affordable, alternatives to payday loans. You can apply for a personal loan from a variety of lenders, from banks to private lenders. The options are practically endless which means you’ll be able to find a loan that best suits your unique needs and lifestyle.
Depending on the lender you choose and the size of the loan you’re interested in, your interest rate and payments will vary. What makes a personal installment loan so much more affordable than a payday loan is a way in which you repay it. Installment payments mean you’ll have a longer period of time to pay off your loan and won’t need to take out another loan just to cover the cost of the first.
Credit cards are a great financial tool if used properly and responsibly. They can facilitate large purchases and can be used as a short-term form of borrowing. This is why they are a good alternative to payday loans. When it comes to using a credit card to purchase something you cannot afford to pay for with cash, it’s important that you proceed with caution as it’s very easy to overspend and rack up a significant amount of debt.
The best way to use a credit card is to pay for something that you know you can afford, either right away or within your credit card’s billing period.
Interested in more information about how a credit card can help your finances? Click here.
Line of Credit
A line of credit is similar to a credit card in that you can use up your available limit, pay it back, and then use it again (for more information on how to use a line of credit, click here). A line of credit also has a minimum payment that must be made each month, but of course, you can pay off your full balance at any point. If you’re considering taking out a payday loan to cover the cost of a specific expense, for example, a car repair, we recommend that you first consider speaking with your bank to see if you qualify for a line of credit.
When applying for a line of credit you’ll typically be offered an interest rate that is not only significantly lower than that of a payday loan but also lower than your average credit card. This makes a line of credit one of the best affordable ways to borrower larger amounts of money.
Home Equity Loan or Line of Credit
If you own a house then using your equity to secure a loan or line of credit is another more affordable alternative to payday loans. Home equity loans or lines of credit work the same way as their unsecured counterparts. In this case, you’re using the equity you’ve built up by paying off a portion of your mortgage to secure additional funding. Because a home equity loan or line of credit is secured by your house, typically you’ll be able to get approved for a larger loan.
It’s important to note that if you need access to your loan as soon as possible, this is probably not your best option as you’ll need to undergo the approval process of the bank you have your mortgage with.
Interested in your rights as payday loan borrower? Read this article.
Borrow from a Friend or Family Member
Asking someone you trust to borrow money isn’t always easy, but it’s, without a doubt, a much better idea than taking out a payday loan. If you are going to ask a friend or family member to borrow any amount of money, it always good practice to agree on all the details before the money exchanges hands. Consider the following:
- Do you have the financial ability to repay the borrowed money within a reasonable time?
- Are you comfortable with paying interest charges?
- How often and in what form will you make payments?
- What happens if you can’t make a payment on time or at all?
- Will there be a written agreement?
Predatory Lending Practices
Reputable lenders perform some form of assessment before they approve or reject an applicant. Payday lenders do not perform any type of assessment and therefore often lend to those who cannot realistically afford a loan.
While payday loans may be predatory in nature, if you choose to apply for one and fully understand the terms and conditions of your contract then the only thing you can do to relieve yourself of the debt is to pay it off. On the other hand, should you believe that you are being coerced to sign a contract you do not understand, are being lied to about the conditions of your loan, or feel as though a potential lender is trying to scam you (for example by asking for an upfront payment) it’s important that you get in contact with the appropriate authorities immediately.
For more information on how to contact your provincial or territorial Consumer Affairs Office, click here.
How long does it take to pay off a payday loan?
If I apply for a payday loan, what will my interest rate be?
- Alberta $15
- British Columbia $23
- Saskatchewan $23
- Manitoba $17
- Ontario $18
- Quebec n/a
- New Brunswick n/a
- Nova Scotia $25
- Prince Edward Island $25
What do I need to get approved for a payday loan?
- Proof of income for the previous 3 months.
- Proof of address (a utility bill is usually a good option).
- Chequing account for automatic transfer of loan and payments.
Where can I get a payday loan?
Once I get approved, how do I get my money?
Looking for more answers? Check out this article.
Responsible Lending and Borrowing
While it’s unfortunate that there are lenders out there who prey upon those in need and those who feel as though they have limited options, it’s important that you, the consumer, make responsible borrowing decisions. Remember, even if you feel as though past financial missteps are haunting you, payday loans are not your only option.
Rating of 5/5 based on 1 vote.
Largest Lender Network In Canada
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
goPeer — Helping Consumers Achieve Financial Freedom by Connecting Canadians Looking For Financing With Canadians Looking to Invest
goPeer is Canada's first consumer peer to peer lending platform and connects creditworthy Canadians looking for a loan with everyday Canadians looking...