Payday Loans: Why They're Risky
Needing money quickly is common, and looking into the risks first is a careful thing to do.
Quick Answer
A payday loan is a short-term loan with high fees, and the Financial Consumer Agency of Canada calls it an expensive way to borrow. If it isn't repaid on time, more fees and interest can be added, and the can grow.
According to the Financial Consumer Agency of Canada (FCAC), you may borrow up to $1,500 and may have up to 62 days to pay it back. You usually repay some or all of it on your next payday.
- You may qualify without a credit check.
- You pay a flat fee instead of interest if you pay on time.
- The lender may ask for a pre-authorized debit or a post-dated cheque for the full amount plus fees.
FCAC says that in provinces with payday loan rules, the maximum cost of borrowing is $14 for each $100 you borrow, and a lender may charge a one-time $20 fee for a dishonoured cheque. In FCAC's own example, $14 per $100 over 14 days works out to an annual interest rate of about 365%.
FCAC lists those provinces as Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island and Saskatchewan. Rules in other provinces and the territories differ.
Cooling-off periods and province-by-province details: these vary by province. Not stated, needs verification here. Your provincial or territorial consumer affairs office can confirm the rules where you live.
- The lender may charge a fee, and your bank may charge an insufficient funds (NSF) fee.
- Interest may be charged on what's still owed, so the total can keep growing.
- The debt may go to a collection agency, which may appear on your credit report.
- The lender or a collection agency may take you to court for the debt.
- The lender isn't licensed in your province. FCAC says payday lenders must have a licence, and your consumer affairs office can confirm it.
- The lender is online and located outside Canada. FCAC notes problems with these lenders may be hard to resolve.
- You're asked to sign a form sending your wages straight to the lender. FCAC says provincial laws prevent this.
- You find yourself taking a new loan to repay the last one.
- Asking for more time to pay a bill, or a payment deferral from a lender.
- A pay advance from your employer, or a loan from family or friends.
- A loan or line of credit from your own financial institution, overdraft protection, or a credit card cash advance. FCAC's example shows these usually cost less than a payday loan.
- Free, confidential help from an accredited credit counsellor or a licensed insolvency trustee if debts have piled up.
What to do now
Take these at your own pace. There's no deadline here.
- 1
Write down what you need the money for and when. A short plan makes the cheaper options easier to compare.
Use the Budget Planner - 2
If you already have a payday loan, call your provincial consumer affairs office to learn the rules that protect you.
- 3
Take one small step at a time. There's no deadline on getting this right.
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Educational only, not financial advice.