- No hassle payday loan.
- Get cash in 3 easy steps — no calls, no fax.
- Receive up to $1500 instantly.
These are just some of the catchy phrases in the new world of payday loans – the Online Payday Loan. Yes, payday lenders have entered the internet age. Now borrowing money has never been easier. No driving to your nearest payday loan store, no standing in line, no need to even bring your pay stub. With just a few keystrokes you too can borrow from one of the most expensive lending sources around. But what are the true costs of clicking your way into debt?
The True Cost Of Payday Loans
One company, Wonga.com, a Canadian site re-branded from the original UK site (complete with snow, hockey and what I assume are reindeer in the header image) makes borrowing so simple it even offers a sliding scale to choose how much cash you want and how long you want it for. And at the bottom of the sliding scale the total cost updates as you slide. In this example image taken from the wonga.com website the cost to borrow $335 for 11 days is $28.48 in interest and fees.
Very cute, but let’s put that cost into perspective. The equivalent annual interest rate on this loan is 282%! But, you say, I’m only borrowing for 11 days and it will only cost $28.48 for this ‘short term, temporary’ loan. And Wonga’s own site says that you really shouldn’t look at the annual rate because your loan is only for a few days. What can be the harm?
Short Term Does Not Mean Temporary
The harm is payday loans are seldom temporary. Wonga’s own website, under educate of all things, asks “Are you stuck in a cycle of debt and struggling to make ends meet?”. If you are resorting to a payday loan the answer is probably yes you are stuck in a cycle of debt – unfortunately it is likely a cycle of payday loans.
On their site, Wonga.com does caution:
“Wonga is here to help with occasional cash flow problems – when you need a short-term cash advance to tide you over for a few days or weeks – but our service shouldn’t be used to manage existing debt or as a regular source of ongoing credit. If you’re already feeling the strain financially, please be aware that a Wonga loan will only add to your commitments because it must be repaid within 45 days.”
So as long as you only borrow the funds for 45 days you are OK? I think not. And here’s why:
- If you don’t pay your loan back after the agreed upon time period (by automated collection from your bank account) you will be charged an additional $20 missed payment fee. Plus you will continue to be charged interest at an equivalent rate of 282% per annum until you do pay off the loan.
- Even Wonga want’s you to be a ‘regular’ customer offering to gradually increase your ‘trust rating’ allowing you to borrow more money with each loan — up to $1500.
So while payday lenders like Wonga.com claim their loans are short term credit because you have to pay them off at the end of the agreed upon period, if you continuously re-apply for a new loan you are caught in a cycle of debt at rates that are not sustainable for very long. While I don’t know what percentage of clients are not repeat borrowers, I suspect it is likely very high.
It’s easy to get into debt with these new online payday loans, unfortunately it’s much harder to get out. If you are caught in the payday loan cycle, whether the traditional bricks and mortar kind, or the ever so flashy new online variety, stop now. If you are having trouble paying your bills, talk to a credit counsellor for budgeting advise or look into your debt relief options. Payday loans are not a solution.