Payday Loans are Dangerous – Here’s Why You Shouldn’t Rely on Them
Have you ever needed quick access to cash that you don’t have? In these scenarios, payday loans are often seen as the answer. Private branches give out payday loans under the condition that the borrower will pay them back shortly, on their next pay day.
Payday loans have a reputation for being predatory, preying on those with low incomes, poor credit, or under dire circumstances. Borrowers often end up trapped in an endless cycle as they struggle to pay off their payday loan debt.
Read ahead to learn more about why you should avoid seeking out payday loans at all costs, and how you can escape the payday loan cycle.
What are Payday Loans?
A payday loan is a short-term, high-cost loan that is often borrowed to cover urgent expenses. These loans come in the form of cash, cheque or direct deposit, and are offered by private companies in physical branches and online. They are called payday loans because the borrower is given a short period of time to pay back the loan – often two weeks, when the borrower receives their next paycheck. In Canada, a payday loan cannot exceed $1,500 and in Ontario, they are limited to a 62-day repayment period.
These loans are often attached to high fees and interest charges that often exceed 400%. As a result, it is often not recommended to take payday loans, because they are exceptionally difficult to repay. However, they still remain a popular option. This is due to the seemingly simple, quick way to borrow money, as the lenders typically do not review credit checks and have limited qualifications for the loan.
Many borrowers end up unable to pay for their loan or the high fees and interest that follow. You should avoid these loans at all costs and consider other options if possible.
Why Should I Be Weary of Payday Loans?
High Fees and Interest Rates
The maximum fee you can be charged in Ontario is $15 per $100 borrowed (typically for a two-week period). If you do not pay the balance owed, including the fee, on the due date, you will incur interest charges and further fees. The interest rate is limited to 2.5% per month. As a result, the fees and interest charges can accumulate very quickly.
These rates are much higher than those found from other types of loans. A bank loan, line of credit, overdraft protection, and a credit card cash advance would all be less costly options.
READ MORE: Payday Loans in Canada
Short Repayment Periods
Payday loans are risky because of their close payment deadline. Borrowers often assume they will be able to find the funds to pay back their loans on time, but fast-approaching deadlines don’t leave room for error or emergencies.
You Will Likely Get Trapped in a Debt Cycle
Unfortunately, it’s extremely common for borrowers to fall into a debt cycle. Borrowers who struggle to repay their loan are faced with costly interest fees, which are, in turn, difficult to pay off. When this happens, the loan, initially meant to be a short-term transaction, creates a seemingly never-ending black hole of debt.
They May Require Direct Withdrawals from Your Account
Usually, lenders will require you to permit them to take pre-authorized withdrawals from your chequing account. This will only add to the aggressive nature in which these companies tend to collect repayments.
Debt Relief Options for When You Get Buried in Debt
Many borrowers turn to payday loans because they think these loans are their only option. In reality, you have other options that are safer than payday loans.
Debt consolidation is a process that does what its name suggests: it consolidates a number of small loans into one large loan. These loans are usually issued by banks or credit unions. Under debt consolidation, you make one monthly payment, instead of following the rules set by the multiple lenders you may owe.
The bankruptcy process is a legal process described in a federal statute called the Bankruptcy and Insolvency Act (BIA). Its purpose is to give Canadians in significant financial distress, a legal, affordable and timely way to get out of debt and to have a fresh financial start. The only professionals authorized to assist you are Licensed Insolvency Trustees (LIT).
A Consumer Proposal is a legal process in negotiating an agreement between the debtor and their creditors where the creditors will agree to forgive a portion of the debt, while the debtor agrees to make an affordable monthly payment towards the balance over a fixed period. This could mean fewer payments, smaller payments, or an extended deadline. These payments are made to an LIT, who administers the consumer proposal pursuant to the provisions in the BIA.
If you need money urgently, you may be compelled to take out a payday loan. Before doing so, you should understand the consequences of taking out loans like these, as they are attached to short repayment periods, steep fees and interest charges, and an entrance into a never-ending cycle of debt.
Instead, consider speaking to an insolvency professional who can help you develop personal financial solution to resolve your debts.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee and Consumer Proposal Administrator. Its professionals have assisted thousands of individuals successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!