Increasingly, Canadians are turning to payday loans when they find themselves short of cash at the end of the week or month, or need extra money to meet an unexpected expense before they receive their next paycheque. We know that for most of these individuals borrowing money from payday loans is not the way they would choose to go but for those with bad credit it is often a last effort to continue to pay their bills each month or each week. Many anticipate that taking out a payday loan will fill a temporary gap in cash needs, thereby allowing them to avoid bankruptcy.
Unfortunately, a payday loan is the most expensive way to borrow. By law (under the Criminal Code of Canada), payday lenders are not allowed to charge more than 60 percent interest on a loan. But when combined with ‘fees’, the true cost is much higher. It would not be unusual for a $300 payday loan, due in two weeks, to require a total payback of $360. That means that the borrower paid $60 to borrow $300 for 2 weeks, the equivalent of almost 600% per year.
A typical payday loan company may charge one, or several of: a set up fee, administration fee, processing fee, convenience charges, verification fees, early repayment fees, cheque cashing fees, NSF fees, roll-over fees and renewal charges. While you may not be charged all of these fees, it is not unusual to see several of these fees associated with one loan. Before you apply for a payday loan, be sure you understand all the fees and charges you will be required to pay. Read your agreement carefully to avoid surprises, especially additional charges in the event you are not able to repay your payday loan on time.
Avoid expensive payday loan rollovers. Payday loan companies will extend an outstanding payday loan (a rollover) for yet another fee. Continuously rolling over your payday loan means that you will remain in debt at very high interest rates.
As noted, the Criminal Code of Canada limits the interest rate charged on payday loans in Canada to 60%. Recent court cases have in some instances ruled that certain excessive fees charged by payday loan companies really amount to a form of interest. In addition, several provincial governments have enacted legislation to limit fees that can be charged. Bare in mind however, even with these limits, payday loans are still the most expensive form of borrowing available.
Several payday loan companies belong to The Canadian Payday Loan Association. Members must adhere to a Code of Best Business Practices put in place by the association, however you should be aware that this association is self regulated and membership is voluntary.
Payday Loans and Bankruptcy
Payday loans taken out prior to the date of bankruptcy are included in the list of debts that will be discharged in a bankruptcy. If however you renew or take out a new payday loan after you file for bankruptcy, this new loan will be considered new debt and cannot be included in your bankruptcy. If you are usuing payday loans and need to declare bankruptcy to avoid that cycle, contact an expert today and discuss your options.
What do I do now?
If you are frequently relying on payday loans to make ends meet, or you are caught in a trap of continuous payday loan rollovers, we recommend that you contact an expert, who can help you review your options to deal with your payday loan and other debt. There are many ways to solve your money problems and it is best to talk to an expert who can explain how a consolidation loan, debt management plan, or consumer proposal, might help stop the payday loan cycle and avoid the need to declare bankruptcy.