Payday loans in Canada
By Maria Montemayor
Posted on October 8, 2021
You might see them on street corners with bright, enticing signs that say, “payday loans” and “cheques cashed.” Or, you may find them online with the promises of “fast cash,” “no credit required,” and “no hidden fees.”
These are payday loan companies, which offer cash advances, installment loans, and cheque cashing. A payday loan is a short-term loan with high fees and interest rates. These loans need to be repaid when the borrower receives their next paycheck.
As newcomers to Canada, it might take some time to acquire adequate credit. If you are not initially making enough money to cover your family’s monthly expenses, then getting a payday loan might sound like a tempting option. After all, it sounds like a quick and easy solution. You go into the store or apply online and, on your next payday, you repay the amount you owe. What could possibly go wrong?
Plenty of things can go wrong
Payday loans typically have higher interest rates attached to them because of their unsecured nature. For the lender, there is a higher rate of risk with this type of loan. To be compensated for this risk, in comparison to secured loans (where the borrower promises assets—like a home or a car—as collateral), there is a higher borrowing fee charged in the form of interest.
Why do people get payday loans?
Payday loans are easy to access and have less requirements to obtain compared to other loans. Traditional lenders usually ask for a credit check, but payday loans only ask you to provide identification proving you are over the age of 18, have a chequing account, and a steady source of income.
The Financial Consumer Agency of Canada, conducted a survey of payday loan users and found that only 43 per cent of respondents knew that a payday loan is more expensive than alternatives that are available. As well, over 60 per cent of people surveyed did not have access to a credit card, and the majority—88 per cent—did not have access to a line of credit.
In terms of what payday loans are used for, 45 per cent of respondents used the loans for unexpected, but necessary purchases like car repairs. And 41 per cent used the loans for expected and urgent expenses like utility bills.
Payday loans have a bad reputation
Payday loans are primarily used by people with low-to-moderate incomes, but even high income earners use payday loans excessively. When people start using payday loans, they may fall into a dangerous borrowing cycle of taking out new loans to try and pay back the initial payday loan and its high interest fees.
Complaints about payday loans
On ConsumerAffairs, one payday loan company is rated 1.3 stars out of 5, taken from the average of 71 verified reviews. While there were a few positive ratings, the majority of the ratings give only one star. If you are unsure of a payday loan company, you can check out the company’s online reviews yourself.
How can people break the payday cycle?
If you have significant debt, you should speak to a professional to get your debt under control. If you have only used payday loans occasionally, next time, you should try getting a loan from the bank or use overdraft protection. For the long term, you can build up an emergency fund to turn to instead of payday loans.