Payday Loans: Know Your Rights
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We get it; at first glance payday loans seem convenient and can come across as a great option when all other options have failed. But what we can’t stress enough is that convenience quickly turns into a nightmare and your quick short term loan that was meant to help out becomes a huge financial problem. The payday loan industry can be conniving, deceitful and downright evil, and that’s no a good day. So if you’re thinking about getting a payday loan or if you already have one that’s starting to spiral out of control, here is everything you need to know.
Learn about how payday lenders prey upon the poor here.
How a Payday Loan Works
Payday loans are a specific type of loan provided by a specific type of lender, here’s a quick break down of what you should expect from a payday loan:
- Payday loans are typically small, less than $1500.00.
- They are short term loans; you have until your next payday to pay them back (this is why they’re called payday loans).
- Payday lenders work out of a retail store or online.
- They are the most expensive type of consumer loan.
- These are unsecured loans; you only need to have some form of income to get approved.
- You’ll provide your payday lender with a post-dated cheque or authorize debit transactions so they can automatically take your payments from your account.
For the most part it is extremely easy to get approved for a payday loan, this is why they are so attractive to people experiencing financial issues. Your borrower will usually ask for the following 3 things:
- Proof that you’ve had a steady income for 3 months.
- Proof of address (a utility bill is usually a good option).
- A chequing account so they can deposit your loan and take payments.
The Cost of a Payday Loan
Payday loans are one of, if not the most expensive form of credit. Before you even consider a payday loan as an option you need to make sure that you’ve exhausted all other alternatives.
In Ontario, legislation has been passed to prevent payday lenders from charging extreme interest rates and fees. And while this legislation has helped to protect consumers, payday loans are still predatory in nature. Since there are set rules for how much a payday lender can charge a borrower in Ontario, we’ll use this province as an example to show the true cost of a payday loan (interest in more information about the true cost of a payday loans? Read this article). But keep in mind if you live in any other province the laws, rules and regulations will be different and lenders will more than likely charge extreme rates.
Let’s compare a payday loan in Ontario to a standard credit card available to anyone in Canada:
|1 loan = $300 for 2 weeks||Payday Loan||Credit Card (23% interest)|
|1 loan will cost||$63||$2.65|
|2 loans will cost||$126||$5.29|
|4 loans will cost||$252||$10.59|
|6 loans will cost||$378||$15.88|
What if You Can’t Pay Your Payday Loan on Time
In the event you are unable to repay your payday loan by it’s due date, there are a number of reprucussions that may follow.
- The lender will charge you a fee for defaulting on your payment.
- Interest will continue to accumulate, spiking the amount you owe.
- If you continue to defult, the lender may sell your loan to a collection agency which will affect your credit score.
- The lender may try to sue you to regain payment.
- Defaulting on your payment may lead to the lender garnishing your wages.
Learn more about what can cause your credit score to drop.
The Law Concerning Payday Loans
The majority of provinces in Canada have in recent years passed some form of payday loan legislation. New Brunswick, Quebec and Newfoundland and Labrador are the only provinces that have no specific laws concerning payday loans, therefore if you live in one of these provinces you need to be extremely cautious when dealing with payday lenders.
For the other provinces that have passed legislation concerning payday loans, here a few of the major issues you need to beware of (we suggest that you make sure you fully understand the payday loan laws or lack of laws in your specific province before moving forward with a payday loan):
- You cannot be charged above 23% interest, some provinces are 21% or $21 for every $100 you borrow.
- You are allowed 2 business days to cancel your contract; you should not be charged any fees for this period should you decide to cancel.
- You cannot be sold anything other than a payday loan from a payday lender.
- “Rollover” is illegal. This means you cannot be approved for another payday loan from the same lender if you haven’t paid off your first one.
Learn about how the payday loan cycle starts.
Rules for Payday Lenders
Again this depends on the province you live in but most payday lenders are required to adhere to at least some version of the following rules:
- Have a business license from the government of the province they operate in.
- Provide you with specific information about your loan including: the exact amount your borrowing, how long your loan will last and the real cost of your payday loan.
- Never ask for assignment of wages or automatic deduction from your paycheque.
- Try to contact you more than 3 times in a week.
- A payday lender cannot try to contact anyone but you to discuss any issues with your loan.
Concerned About a Payday Lender?
If you’re concerned about a payday lender that you’re currently dealing with, get in contact with the consumer protection branch of your provincial government.
Always Have a Repayment Plan
Before you consider taking on any kind of debt, especially a payday loan you need to have a repayment plan in place. The consequences of being unable to make your loan payments on time and in full will negatively affect your finances for years to come.
Build your repayment plan by learning how to budget.
Ask the Right questions
Before you make any decisions about applying for a payday loan you should ask yourself the following questions:
- How much will this loan actually cost me in the long run?
- Is that cost worth it? Or do I have other options?
- Are there any hidden fees I should be aware of?
- Is this a legitimate payday lender?
- Is this payday lender violating any of the payday loan laws of the province I live in?
Even more questions you should ask yourself before you get a payday loan.
Once you’ve asked yourself these questions you should have a better idea of what you’re getting yourself in to.
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