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Dealing with debt can be hard, especially in Calgary, where living costs are some of the highest in Canada. If you relate to this when you might have considered taking out a payday loan at some point to help tide you over until your next paycheck. Since payday loans are quite easy to get, the idea seems appealing at first. Not so fast! As convenient as they are, payday loans can do serious damage to your finances.
Need more information about loans in Calgary? Look for it here.
Payday Loan or Personal Loan? Which is Better?
As we said, payday loans are very easy to get. They are usually small loans, $1,500 or less and must be fully repaid within 14 days of your approval. They are also appealing because:
- No credit check will be performed
- They offer same-day approval
- You’ll receive your funds on the same day
- An Alberta address, viable income, and bank account are the only proof required
Personal loans are slightly different, even though you’ll also be applying for a lump sum, which you’ll have to repay by a certain due date. Personal loans are different and often more beneficial because:
- You can apply for much larger loan amounts (up to $100,000 with some banks)
- Your loan will be divided into equal payments, making it more affordable
- You can negotiate for a longer or shorter payment schedule
- Interest rates are typically much lower than with payday loans
- Penalties for defaulting on payments are usually less severe than payday loans
- Paying off a personal loan can help improve your credit
Want to know how you can get the best personal loan in 2018? Find out here.
Why is the Payday Loan Cycle So Bad?
While payday loans are easy and convenient, there are very few instances where they would truly be helpful. Here are a few basic examples:
- When your credit is so bad that you don’t qualify for a regular loan or credit card
- When you don’t want your credit checked for another reason (avoiding hard inquiries, etc.)
- When you have a financial emergency that needs immediate financing
- When your next paycheck will be large enough to cover the full loan, including the principal, interest rate, and extra fees
- When your paycheck is large enough to cover your other typical expenses
That being said, the reason that payday loans can be such a hazard to your financial health is that they come with extremely high-interest rates, sometimes up to $15 per $100 you borrow (15%), which is the limit in Alberta. They’re also accompanied by a ton of different fees for administration costs, cheque cashing, and other service costs.
Wondering if you can beat your lender’s interest rate? Click here to know more.
The problems begin when you’re unable to pay back your loan by its designated due date, which might be an issue if you don’t make a lot of money. If you’re late, even by a day, you’ll be charged a hefty penalty, plus additional interest on the amount you have left to pay. You then use up all your resources, trying to pay it back. Even if you do manage this feat, your bank account might be drained, forcing you to apply for another payday loan to cover necessary expenses, thereby putting you in a cycle of debt that may take years to end.
Take a look at this infographic for a better picture of the payday loan cycle.
What is Predatory Lending?
When it comes to payday loans, there is another important issue that should be considered before you apply, the threat of predatory lending and scamming. Some Calgary borrowers can fall into such bad debt situations and apply for payday loans in order to resolve them. Predatory lenders and scam artists know this and are ready to take advantage.
Check out these other Canadian financial scams that are making the news.
Predatory lenders in Calgary and Canada, in general, will use your financial desperation as an excuse to charge you unreasonably high-interest rates and fees, costing you hundreds, maybe even thousands of dollars more than you should’ve paid for a small loan. Scammers, on the other hand, are fake companies that are out to steal your personal and financial information. Again, they’ll use your need for fast cash against you, then ruin your finances the first chance they get.
Here are some warning signs everyone should know:
- They don’t have a well-founded reputation – Whichever type of lender you apply with in Calgary and Canada, in general, make sure they have a legitimate reputation. Research their organization. If you find no real customer reviews or don’t see their company listed in the Better Business Bureau database, don’t apply. Click here to learn how you can compare lenders in Canada.
- They don’t have proper advertising or loan contracts – Legitimate payday loan lenders are required, by law, to provide you with all the information concerning your loan and its costs. These details must be listed in both their advertising and in the loan contracts themselves.
- They avoid your questions or use forceful sales tactics – Again, payday loan lenders in Calgary need to answer any questions you have about your loan. If they’re clearly glossing over your questions or if they’re trying to manipulate you in some other way, maybe by using threatening language, report them to the authorities.
- They charge more than 15% interest – It is illegal for any lender in Alberta, including Calgary to charge more than $15 per $100 you borrow. If they do, they are definitely trying to scam you.
- They allow for “rollovers” – A rollover is when a lender allows you to apply for a second payday loan before you’ve paid back the full amount of your first payday loan. Since this can cause tremendous debt, this practice has been outlawed in Alberta, as well as most of Canada.
Looking for some debt relief from predatory loans? Try reading this.
Are There Other Rules Payday Loan Lenders Should Follow?
Since even legitimate payday loans can be problematic for Calgary borrowers, there are a few other rules that lenders must adhere to if they want to operate legally, including but not limited to:
- All lenders must have a business license that’s been validated by the Alberta provincial government
- All lenders must allow you a 2-day cooling off period, within which you may cancel your loan without penalty
- No lender is allowed to demand payment by assignment of wages or automatic deduction from your paycheck
- No lender is allowed to contact you more than 3 times per week
- No lender can discuss your loan with anyone other than you
Check out this infographic to learn all about the true cost of borrowing.
Is it Possible to Break the Payday Loan Cycle?
Depending on how bad your financial situation has become in Calgary, breaking the payday loan cycle can definitely be hard. Since all your income may be going toward paying down your debt, you might have nothing left for your other expenses.
Here are some ways to break the cycle:
- Personal loan – As we explained above, depending on how much debt you have and how bad your credit is, a personal loan might be the best debt solution.
- Debt consolidation program – You’ll work with a credit counsellor in Calgary who will create a plan of action based on your finances. They’ll get in contact with your creditors and hopefully negotiate a payment plan. You’ll then make regular payments through your counsellor to pay back your creditors.
- Consumer proposal – This involves hiring a licensed insolvency trustee in Calgary to offer a proposal to your lenders for you to pay back a portion of what you owe. If accepted, you’ll make payments through your trustee, who will send the payments to your lenders for you.
Here are some ways to avoid the cycle altogether:
- Installment loans
- Short-term loans
- Guarantor loans
- Regular credit cards
- Secured credit cards
- Vehicle title loans
- Borrowing from your home equity
- Borrowing from friends or family
Missing a Payment or Getting a Payday Loan?
Every credit product has its advantages and disadvantages, especially when it comes to falling behind on your payments. However, payday loans definitely have some of the heftiest penalties, such as a $20 charge for defaulting or when a cheque needs to be returned due to non-sufficient funds. While defaulting on your credit card bills or regular loan payments does come with similar consequences, they still won’t usually be as bad as when you don’t pay your payday loan back on time.
Looking for another type of debt management product? Take a look at this.
Choose Loans Canada
In the end, the choice you make should be made based on your specific financial needs. Do not apply for a payday loan unless it is your only option in Calgary. If you’d like to avoid the payday loan cycle or you need help getting out of the one you’re in, contact Loans Canada today. We’re confident that we can help you.