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How Do Payday Loans Work?

Sometimes, emergencies happen – your car breaks down, the roof on your house needs repair, or your child needs expensive medication for an illness. If you don’t have enough money saved for emergencies such as these, it can be a challenge. Oftentimes, it’s these types of situations that cause people to take out payday loans.

Payday loans are short-term loans usually up to $1,500 that can help individuals get through a rough spot. They are called payday loans because typically, they are paid back on the next pay day. Oftentimes, people use these types of loans to pay for things if they run out of money before their next paycheck.

While relatively easy to get, they are a very expensive way to borrow money.

How payday loans work in Canada

Usually, when someone takes out a payday loan, it’s typically a modest amount of a few hundred dollars that is due back within two to four weeks. Upon taking out a loan, the lender will usually require proof that you have a regular income, a bank account and a permanent address.

You will then be asked to fill out a form authorizing the payday loan company to withdraw the total loan amount plus fees directly from your bank account when the loan is due. Alternatively, you may be asked to write a post-dated refund check for the amount you are borrowing, plus the loan fee. You will leave the post-dated check with the lender and they will cash it on the day indicated on it, which will be within the next month.

Either way, the payday loan company will have the ability to recoup their money when the time comes. If you do not have the money in your bank account when the money gets withdrawn, you’ll be charged a non-sufficient funds fee by your bank, which could be $45 or $50. Your loan will continue to accumulate with interest.

In some provinces (Newfoundland, Prince Edward Island, Quebec, Manitoba and the territories), you can ask for an extension on your loan, but this usually causes more fees and interest charges, ultimately increasing your total debt amount. In New Brunswick, Nova Scotia, Alberta, BC, Saskatchewan and Ontario, payday lenders can’t extend or rollover your payday loan.

When you request your payday loan, you’ll usually receive it in cash or as a deposit into your bank account. But in some cases, the lender may ask you to take the loan out on a prepaid card, which may carry an activation fee.

The real cost of a payday loan 

A payday loan is one of the most expensive loan options out there. In fact, average payday loan costs $17 per $100 that you borrow, which equates to an annual interest rate of 442 per cent! Before taking out a payday loan, research some payday loan alternatives or use an online calculator to discover just how much a payday loan will actually cost you.

With these very high fees, payday loans don’t really help you to solve your financial problems. Instead, they make things worse because you will most likely be unable to repay the loan on time, and therefore have no choice but to roll it over and extend, or face the consequences of late payment. At this point, you will keep accumulating fees and interest, and you will have entered a debt cycle that is very difficult to break out of.

Avoid using payday lenders for everyday expenses, such as rent, groceries or utility bills. If you are using payday loans to cover these expenses, it’s a sign you’re in financial trouble.

Be wary of payday lenders

Many payday loan companies are not licensed and therefore do not follow the laws designed to protect consumers. If you must use a payday loan, only use a licensed company. Be especially wary of those located outside of Canada, as it may be difficult to solve any problems with them. Also be careful with online sites that say they offer payday loans. Some will only collect your information and give it to an actual payday lender.

If you do not pay back your loan, there can be serious consequences. In addition to having multiple surcharges added to your total, the lender could hire a collection agency to collect the money on their behalf. Collection agencies are notorious for calling you, your friends, your relatives and even your employer in order to get their money. Additionally, when your debt is sent to a collection agency, it results in a hit on your credit report.

If this doesn’t scare you yet, payday lenders or collection agencies could sue you for the debt, seize your property or assets, and even take you to court to get permission to garnish your wages, which is legal in New Brunswick, Nova Scotia, Ontario, Manitoba, Saskatchewan, Alberta and BC. This means that your debt will be deducted directly from your paycheck and paid back to the lender.

In Newfoundland, Prince Edward Island, Quebec and the territories, there are no laws governing when and how often a payday lender can contact you about your loan, or on what tactics they can use to get you to pay.

How to get back on track

Payday loans can be helpful only if you only use them once or twice in your life in the event of an emergency, and will be able to pay it back immediately. When payday loans become a survival strategy, they leave you worse off than you were at the beginning. The long-term solution is to make a commitment to getting back on the right financial track.

If you find yourself in a situation where you are swimming in debt and can’t see a way out, our credit counselling team can help you. We will equip you with the tools and skills you need for effective money management. At the end of your journey, you will be saving money, investing, and financial freedom will be within your reach.

Contact us today for a free consultation.

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