Payday Loans

While payday loans may seem like an extremely convenient and maybe even affordable way to borrow a small amount of money as quickly as possible, they are in fact one of the worst lending products you can get. 

Every day, Canadians all across the country deal with financial issues and emergencies, their cars break down, they have to take expensive last-minute trips to deal with family emergencies, and they lose their jobs. All of these things are financially straining and often lead to payday loans. The issue is, payday loans aren’t the solution that these Canadian need, they are the problem. 

The True Cost of Payday Loans 

Applying for and getting approved for a payday loan is a deceptively simple process. All you need to do is request a loan from a payday lender, either in person or online, have a bank account, be at least 18 years old, and be employed or have some form of guaranteed income. Have all that and you’re basically guaranteed a loan

While this might all sound not so bad to you, the problem with payday loans is that they create a cycle of debt, one that is almost impossible to get out. 

How much does it cost to take out a payday loan in my province?

The maximum amount a payday loan provider is allowed to charge for a $100 loan is:

  • British Columbia – $15
  • Alberta – $15
  • Saskatchewan – $17
  • Manitoba – $17
  • Ontario – $15
  • New Brunswick – $15
  • Nova Scotia – $19
  • Prince Edward Island – $25
  • Newfoundland and Labrador – $21

Payday Loans vs. Personal Loans

Payday Loans

The idea of a payday loan can be very appealing especially if your current financial situation isn’t so great. But what payday loan providers don’t advertise is that once you take out one loan you’ll be sucked into a cycle that will completely ruin your finances. Payday loans do not exist to help out people who need financial help they exist to make money for the providers. Here’s what you need to know about payday loans.

Interest Rates

Payday loan interest rates are some of the highest for any type of loan; some carry a 500% yearly interest rate which will inevitably force you to pay more for interest than the original loan amount. Here’s the scenario, you take out a $500 payday loan which needs to be paid back in two weeks. Once the two weeks are up you’ll owe your provider at least $600 if not more. This is about a 20% interest rate for two weeks (but amortized over a year, the amount is much greater) but the problem is that in Canada this is the low end of the spectrum and if you can’t afford that extra $100 you’ll be forced to take out another payday loan.

The Payday Loan Cycle

The payday loan cycle is one of the worst financial situations to be in. You are pulled into the cycle when you can’t afford to pay back your first payday loan. This happens because payday loans need to be paid back by your next paycheque. Let’s say you take out a $500 payday loan today because you have no money and only get paid next Friday. But on the following Friday, the payday loan company takes back their $500 plus interest and now you have no money again and you need to pay rent and buy groceries. This is where the cycle starts because now you need to take out another payday loan to pay rent and buy groceries.

How to Break The Payday Loan Cycle

Personal Loans

Small personal loans are just as simple and quick as payday loans but they come with significantly fewer problems. If you’re currently thinking about taking out a payday loan to cover some of your financial burdens then we urge you to reconsider as a payday loan will not solve your financial issues, it will only create more for you. Instead, choose a small personal loan from a private lender who will work with you to get the money you need and the payment plan you deserve.

Interest Rates

Interest rates associated with small personal loans are significantly less than those of a payday loan. Small personal loans are meant to help people with their finances and won’t suck them into a horrible cycle of debt. What’s even better is that because you’ll be able to afford your payments and won’t be forced to pay more in interest than the original loan amount.

Payment Plans

Personal loans come with installment payment plans where you’re able to pay off the loan with small affordable payments over an extended period of time, unlike payday loans where the full balance needs to be paid back in one payment. A $500 installment loan will most definitely help you deal you’re your financial issues, whereas a $500 payday loan will only create more issues. A simple, inexpensive and easy to understand payment plan is the key to getting out of debt and making better financial decisions. An installment loan means you won’t be bogged down with the stress of making one huge payment but instead, you’ll have a longer payment period and make smaller payments.

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Can You Get a Payday Loan With Bad Credit?

Most payday loan companies do not run a credit check when they review a loan application. This means that having bad credit will not affect your chances of being approved for a payday loan in most cases. With a payday loan, you are limited to how much money you can borrow, however. Most payday loan companies will offer you approximately $100 to $1,500, depending upon many different requirements that you must follow. In many cases, you will have the money in your hand within an hour if you qualify.

Check out e-transfer payday loans Canada for faster funding.

Is a Payday Loan Ever The Best Option?

While our number one recommendation is for Canadian consumers to avoid payday loans if possible, we understand that they are certain situations where taking on a payday loan is the only option. For example, in an emergency situation where additional money is needed as soon as possible, a payday loan could be the best choice simply because of its quick approval times. Furthermore, if you could guarantee that you would be able to repay the loan by your next paycheque, then choosing a payday loan to cover an important expense may be the best choice. But, of course, this is where the issue with payday loans arrises. Now one can predict the future and it can be very hard to know for sure that you’ll have the money needed to repay the loan on time. 

Consider These Factors Before Applying For a Payday Loan

Before you decide to apply for a payday loan, it is important that you consider the following six factors. These will help you determine if a payday loan is the right option for you. 

Your Current Financial Situation

Are you currently struggle to make ends meet? Do you already have a significant amount of debt that you struggle to keep up with? Unfortunately, while a payday loan may seem like a great solution, they usually only increase financial hardship.

Available Alternatives

Are there any alternative options available to you? Can you borrow money from a friend or family member? Can you apply for a more affordable installment loan instead? 

The Two Week Term

Payday loans must be repaid when you receive your next paycheque, typically within two weeks. Will you have the money to repay the loan, plus interest, in two weeks. 

Amount Borrowed

Is the amount you’re able to borrow enough to actually help with your financial issues? Or, will it only add to your debt levels and make dealing with necessary expenses even more difficult?

Interest Rate

Before signing on the dotted line, ask about the APR associated with the payday loan. Typically, payday lenders only advertise the two-week fee. Payday loan APRs are often 400% or more.

Penalties & Fees

What are the additional fees associated with taking out a payday loan? Are there excessive or even illegal administrative fees? Will you be significantly penalized for making a late payment? 

40% of respondents did not know that a payday loan is the most expensive way to borrow.

Financial Literacy vs. Financial Well-Being And Credit-Constrained Canadians Survey


Canada’s Number One Alternative to Payday Loans

Loans Canada is the country’s number one alternative to payday loans. We’ve partnered with lenders and service providers all across the county to provide our clients with the loan, credit, and debt relief products they need so they don’t fall victim to the payday loan cycle of debt. 

If you’ve been thinking about taking out a payday loan or if ever in the future you need access to money quickly, please consider any of the following options before you decide to take out a payday loan. 

  • A small installment loan
  • A line of credit
  • Tap into your home equity
  • Borrow from a friend or family member 

Best Payday Loan Alternatives – Installment Loan Lenders

AmountAPRTerm
(Months)
Type of Loan
FairstoneUp to $35,00026.99% - 39.99%6 - 60Secured & unsecuredMore Info
easyfinancialUp to $15,00029.99% - 46.96%9 - 60Personal loanMore Info
Mogo Finance$5,000 - $35,0005.9% - 45.9%12 - 60Personal loanMore Info
Borrowell$1,000 -$35,0005.99% - 29.19%36 – 60Persona loanMore Info
Loan AwayUp to $5,00019.9% - 45.9%3 - 36Personal loanMore Info
Lending MateUp to $10,00043%36 - 60 Guarantor loanMore Info

Payday Loans FAQs

Why are payday loans so expensive?

Payday loans are expensive because the full amount borrowed must be repaid within 2 weeks and they typically have APRs of 500% or more. 

What do I need to get approved for a payday loan?

One of the main reasons why payday loans are so popular is because of how easy it is to get approved. Applicants need to be the age of majority in their province, have a permanent address, a bank account, and a steady income.

What happens if I can’t pay back a payday loan?

As with any type of loan, if you fail to pay back your payday loan, typically you will be charged a late fee and may even have your account sent to collections

Why are payday loans bad?

Payday loans are one of the most expensive forms of financing, they are designed to trap you in the payday loan cycle of debt. Because the full amount must be repaid in 2 weeks, most borrowers who are already struggling financially, won’t have the money necessary to do so. This can lead to more debt, credit score problems, and ultimately a cycle of debt that is next to impossible to get out of.  

Looking for An Alternative to Payday Loans?

If you’re interested in more information about the loan options available to Canadians looking to stay away from the payday loan cycle, Loans Canada can help. 

Loan Glossary

Terms
Accrued Interest

Interest that is earned by an individual, but not yet received. Or, interest that is owed, but not yet paid. Interest is typically earned or payable after a certain period of time, such as a month or a year, which is why it can accrue.

Annual Percentage Rate (APR)

The interest rate you pay over a full year in exchange for borrowing. An APR is expressed annually but is typically charged monthly. You can determine the total monthly interest you’ll pay on debt by multiplying the borrowed amount by the APR and then dividing by 12.

Assets

Anything that has financial value is considered an asset. In order to reap the benefits of an asset, you must also own it as an individual or business. When it comes to debt, usually only real estate, jewellry, vehicles, and investments are considered assets.

Borrower

An individual or entity that takes something (for example money or equipment) with the intention of returning it to the original owner. When the borrower it taking out a loan, there is usually an agreement involved and applicable interest.

Cash Advance

A cash withdrawal from a credit card. Cash advances are a very expensive form of financing as the interest rate on the borrowed amount is higher and there is often a flat fee. In addition, interest becomes effective immediately after you withdraw the cash, instead of after the balance due date.

Co-Borrower

An individual who shares an obligation of something that was borrowed with one or more people. All co-borrowers listed on an agreement are fully responsible for repaying the obligation.

Collateral

Any asset that is used to secure debt. In the event that the borrower defaults on the loan, the lender has the right to seize the asset and sell it to cover the owed amount. Collateral is also commonly referred to as security.

Cosigner

An individual who agrees to make your loan payments and otherwise be responsible for your debt in the event that you default on the loan. Using a cosigner is a popular option for individuals who have trouble securing debt on their own.

Cost of Borrowing

All of the costs a borrower incurs when borrowing an asset or money. Examples of borrowing costs include legal fees, interest, loan origination fees and penalties.

Debtor

An individual or entity that owes a sum of money to a creditor.

Delinquency

Failure to pay the minimum payment on a loan or account on or before the agreed-upon payment date. Delinquency is typically categorized in 30, 60, 90 or 120 days since lenders typically have monthly payment cycles. Delinquent accounts may eventually turn into defaulted accounts.

Dependent

An individual who relies on another individual for financial support. Usually, this refers to a family member, common-law partner or spouse who is unable to financially support themselves.

Equity

The market value of an asset you own less the amount still owed (including any additional fees to sell or repay debts) on the loan used to purchase the asset if any. Equity increases when you pay down the debt as well as when the value of the asset increases. Equity can be calculated at any point in time and is also referred to as lendable value or net value.

Installments

A payment schedule that breaks up an owed amount of money into several equal amounts, otherwise known as installments, which are paid over an agreed period of time.

Loan

An amount of money that is borrowed by one entity from another with the expectation that the amount will be paid back. Interest is typically applied on the owed amount.

Loan-to-Value Ratio (LTV)

The ratio of what amount was borrowed to purchase an asset in relation to the market value of that asset. The formula would be: the total amount borrowed for the purchase divided by the total selling price of the asset. The borrowed amount can differ from the selling price if the individual makes a down payment, for example. In general, the lower the LTV, the more favourable the terms of the financing will be.

Payday Loans

A short term, small loan that a borrower promises to repay on their next pay day. Payday loans are known to be an expensive and risky form of financing that makes it challenging for the borrower to repay and manage.

Payment Period

The period of time over which a borrower is obligated to make a payment. Payment periods could be weekly, bi-weekly or monthly, sometimes even longer.

Prime Rate

The prime rate advertised by a lender is typically based on the Bank of Canada’s interest rate that is set each night, which may change at any time.

Principal Balance

The total remaining balance of a loan, without considering interest and other fees.

Secured Loan

A loan that is secured by an asset known as collateral or security. In the event that the borrower defaults on the loan, the lender has the right to seize the asset securing the loan and sell it to repay the owed amount. This type of loan bears less risk for the lender, but more risk for the borrower.

Unsecured Loan

A loan that is not secured by an asset known as collateral or security. In the event that the borrower defaults on the loan, the lender will not have the opportunity to seize the collateral or security to repay the owed amount. This type of loan bears more risk for the lender, but less risk for the borrower.

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