Ontario residents are just as susceptible to debt problems as any other Canadian. If you’re among them, you might be thinking about payday loans and wondering if they’re the only available solution to your financial worries. Be very careful, because payday loans come with many downsides that could only worsen your financial situation in Ontario.
The Pros and Cons of Using Payday Loans
Payday loans might not be 100% bad for you. In fact, there are some rare instances where they may be useful, such as:
- When you have an alarming financial issue or serious expense that requires immediate action
- When you’ve exhausted all your other options (i.e. you have no credit cards or you don’t qualify for any debt solutions)
- When you’re 100% certain that your next paycheck will be large enough to cover the entire cost of your payday loan
Pros in these situations:
- No credit inquiry will be made. Even if you have terrible credit, all you need for approval is proof of your address, steady income, and chequing account.
- Same day approval. For the most part, payday loans can be applied for and received within a few hours when you go to an in-store location. If you apply online, your approval might take one or two days.
Cons in these situations:
- Scamming is a risk. The vast majority of people borrowing payday loans in Ontario are doing so because they have a financial emergency or don’t qualify with typical lenders in Ontario. Scam artists often use their desperation to sell them fake loans (mostly online) in an attempt to steal their personal and financial information. If you come across a “lender” that doesn’t have a solid reputation or legitimate credentials, stay away from them!
- Unfavorable interest rates apply. While payday loans typically come in small amounts ($1,500 or less), they do have higher interest rates than any other credit product available. As of January 1st, 2018, the maximum rate a payday loan lender can charge is 15% ($15 for every $100 you borrow).
- Additional fees are added. Even if a payday loan lender in Ontario is legitimate, you can bet that they’ll find ways of charging you extra for everything they legally can. Additional fees can sometimes reach 15-35% of your loan amount.
- Payday loans can quickly lead to bad debt when not handled responsibly. Like any type of credit product, payday loans need to be used sensibly. If you’re not absolutely certain that you’ll be able to pay your full balance by your next paycheck, it might be best to hold off. If you don’t make your payments on time, you’ll be charged a penalty fee. Since payday loans are so easy to get, many borrowers in Ontario end up relying on them too much, ultimately sending them into a pattern of bad debt that can take months, even years to recover from.
Check out this infographic to learn how to break the cycle of payday loan debt.
Cracking the Payday Loan Cycle
While the payday loan cycle can be difficult to overcome for any individual in Ontario and the rest of Canada in general, there are ways of cracking it or avoiding it altogether. Here are some helpful solutions, many of which are offered at Loans Canada:
- Using your credit cards. If you qualify and have the finances to pay your bills on time, your credit cards can save you a lot of stress. While they can also cause bad debt when handled irresponsibly, at least your interest rate is likely to be lower, and you’ll have a minimum payment to help you avoid late penalties.
- Borrowing from friends, family or coworkers. Working up the nerve to ask the people you know for help can be hard. However, if it stops you from entering the payday loan cycle, give it a try.
- Using your home equity. If you own or are in the process of mortgaging a home, you may have built up enough equity to cover your various expenses or consolidate your debts. Be careful, however, because, under certain circumstances (ex: second mortgages), your home may act as collateral, possibly leading to a foreclosure if you miss too many payments.
- Applying for a personal loan. While you will generally need to have decent credit when applying through your bank, there are plenty of alternative and bad credit lenders in Ontario who will grant you one of these installment-based loans. In both cases, however, there’s still the potential for a better interest rate on a larger sum of money with cheaper fees and more reasonable payment terms.
- Leveraging your car’s title. If you fully own a car, you can apply for a “car title loan”, the amount of which will depend on the vehicle’s current market value. Keep in mind, however, that your car’s title will be used as collateral. If you default on too many payments, you could lose your vehicle, so once again, be certain you can afford them before offering up your car.
If you’re already in bad debt, you can also try a:
- Debt consolidation loan. While you may need a decent income and credit status, one of these loans can help you out of a real jam. If approved, you’ll use one large loan to pay off all your smaller ones, giving you one regular payment and interest rate to deal with, rather than several.
- Debt management program. If you’re applying for one of these initiatives, it means that your debt is becoming unmanageable. Here, you’ll work with a certified credit counsellor in Ontario, who will contact your lenders to negotiate a more reasonable payment plan. If the program is accepted, you may even get your payments reduced.
- Consumer proposal. If you’re in bad debt, but a DMP is off the table, you can also hire a licensed insolvency trustee, who will draw up an unbreakable legal contract for an established payment plan between you and your lenders. If approved, you’ll make payments through your trustee, who will pay your lenders for you, again with the possibility for a reduced balance.
- Bankruptcy. Declaring personal bankruptcy is another last resort alternative that could cause long-lasting damage to your credit and finances. However, it may be your only option if your debts are totally unmanageable. At least your debts will be cleared and all lenders/collection agencies will cease to pester you, allowing you to start over with a mostly clean slate.
More information about consumer proposals in Ontario.
Knowing Your Payday Loan Rights
According to the Payday Loans Act of 2008, payday loan lenders in Ontario must follow certain rules in keeping with the rights of their borrowers, such as:
- They must be licensed by the Ontario Government
- They cannot charge more than $15 per $100 you borrow. They also cannot charge you more than 50% of your net income per loan
- They cannot offer you a “rollover” option (accept your application for another loan if your first is not paid in full, or use your second loan to pay your first)
- They cannot accept or demand payment via an automatic deduction from your paycheck, also known as “assignment of wages”
- They must have specific advertising (posters, flyers, etc.) detailing what their loans could cost you over time (including their annual percentage rate)
- On the first page of any loan contract, they must include: specific details concerning the sum you’re borrowing, the length of your payment term, and the exact amount you’ll pay overall (including interest, administrative fees, etc.)
If you default (don’t honor your loan agreement) they cannot:
- Contact your spouse, relatives, friends, colleagues, etc. at any time
- Contact you more than 3 times a week or on holidays
- Use aggressive or abusive pressure tactics to demand payment
- Deposit a post-dated cheque or pre-authorized debit more than one time if it will lead to your bank charging you extra fees (overdraft, non-sufficient funds, etc.)
For a more detailed explanation of these debt relief methods, read this.
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Loans Canada, Your Go-To Source of Payday Loan Relief
If you’re thinking about using a payday loan in Ontario to finance something important to you, or if you’ve found yourself trapped in a payday loan cycle, reach out to us today. We’ll put you in contact with better sources of better credit products. Simply apply below!