It happens right? You get into a severe cash crunch and you desperately need to get some funds NOW.
From an emergency car repair, to a cheque that bounced, to a bill that absolutely must be paid – in a month when your credit card is already maxed out. That’s when it’s easy to stumble into the world of payday loans.
What is a payday loan, exactly? Payday loans are loans that are given out for relatively small amounts of money for short periods of time. The idea behind a payday loan is that it gives you some cash to tide you over until the next payday, with the idea that you will use your future paycheck to pay it off.
Payday loans usually require access to your checking account to deposit the loan and later to access the repayment funds. They are a way for people with poor credit (or no family or friends they want to tap) to gain quick access to cash in a pinch – it usually only takes a few hours to a few days to get the loan approved.
It seems like a quick, easy fix. You’ve found yourself short of cash until your next paycheque, so why not get a payday loan to carry you over? Typically, this type of loan is $1,500 or less for a maximum term of 62 days. Money is advanced in exchange for a post-dated cheque or some other form of pre-authorized payment. There are a multitude of companies to choose from who provide these loans. They are usually within walking distance or you can easily apply on-line.
According to Statistics Canada, about 3% of Canadian families have obtained a payday loan. On average, Canadians borrow $300 for a two-week term – this doesn’t sound like an unmanageable amount. The problem arises when you run short on funds again for your next pay. So, you use your paycheque to pay the first loan and then borrow a higher amount to cover the additional interest costs. Consumers can find themselves in a cycle of perpetual borrowing, with no end in sight, as they depend more and more on these loans.
The issue is the high interest rates and fees. Many payday lenders charge high fees and penalties for late payments. One company website posts the annual interest rate at over 500%. You would never consider paying a bank that interest rate for a loan.
In a case currently in the courts, a payday loan company has come under scrutiny in four provinces. In Ontario, the government wants to revoke their license alleging the fees they charge contravenes the province’s maximum cost of borrowing of $21 per $100 loan.
Because these loans are targeted at a segment of society who can’t get a bank loan or a credit card, these lenders know that their customers are repeat customers and this has caused some to refer to them as using predatory lending practises.
Remember, these companies are there to make money. If you decide to use this type of company ensure to read the terms and understand the fee structure including the interest rates, penalty fees, financing charges, etc.
The Bottom Line
Payday loan borrowing can be an expensive cycle that is difficult to break and the consequences of taking out a payday loan can be many times more costly than the initial expense. If you are in debt and struggling to make ends meet, consider getting financial counseling to find a way out of your tight circumstances.
Payday loans when used as a short term financial relief alternative, paid back when due, can assist some. But in many cases they are never used on a short term basis as consumers fall into the cycle of not being able to repay.
SOURCE: Investopedia, Fresh Start
