Many people seeking credit counselling have relied on Payday loans at some point to get through their week or month because of overwhelming debt problems. Payday loans are not the best way to get debt help or handle your monthly debt obligations. In the end they will result in more service charges and interest charges from the lending company which costs you more and makes it harder to get out of debt. Repeated payday loans usually lead to the need for intervention and advice from a credit counsellor or a licensed Trustee and Consumer Proposal Administrator who can assist you in your options to get your life back and your debt under control. Sometimes when this situation has placed someone in a severe crisis financially, the only options left to relieve their indebtedness are to present their creditors with a consumer proposal or file for bankruptcy. Refraining from obtaining Payday loans can help in keeping you from further financial problems.
What is a Payday Loan?
A payday loan is an advance of funds or short term loan against your next paycheque, given to you with a very expensive fee and high interest charges. You have to promise in writing to pay the lender back when you receive your next employment cheque, usually within 14 days. The lender typically advances you 30 to 50% of your take home pay.
You will need to provide proof of income, a bank account, your address and sign a loan agreement with them. Be sure to read this agreement carefully before signing it. You may also be required to give the lender a post-dated cheque, allow the lender to deduct the full amount from your bank account or you may have to return to the lender in person to pay it directly. Be aware that paying your Payday loan on time does not improve your credit score.
PAYDAY LOAN FAQ’s
What is the cost of payday loans compared to other borrowing options?
We have provided you with an easy to understand chart called Payday loan cost vs. other ways of borrowing. This chart will show you how much more a payday loan will cost versus a line of credit, overdraft protection, or cash advance on a credit card.
What are other alternatives to Payday Loans?
Your financial institution may be able to help with:
- A line of credit;
- Overdraft protection; or
- Cash advance on a credit card.
What happens if I can’t pay back the payday loan on time?
If you do not pay back your Payday loan as promised, the lender may charge you a penalty fee for non-sufficient funds (NSF) which is usually $20 – $50. Your bank may also charge you another fee if your account was short the total amount the lender tried to take from your account. Interest charges will continue to build on the total amount you owe to the lender as well. These extra charges make if even more difficult to pay off the loan.
As well, the lender may try to contact your friends, family and even your employer to locate and speak with you regarding the collection of the debt. If you do not respond or pay back the loan your credit score could drop when the lender sends your file to the collection agency. If it goes to the next step and you end up in court being sued, the court can then set in motion a wage garnishment or take your assets (property you own) to pay the debt.
What should I consider before taking a Payday Loan?
Consider the following before taking out a payday loan:
- Can you manage until your next payday without incurring this debt, charges and interest that comes with it?
- Ask for extra time to pay your bills instead.
- Look at a cheaper advance from family, friends or your employer.
- Consider if you are sure you can pay back the loan or will you have other expenses coming up leaving you without the funds to pay it back.
- Read the payday loan paperwork carefully and keep all documents for future reference.
- Check the fees and interest charges assigned to the loan.
- Consider talking to a Trustee – if you are regularly unable to meet your debt obligations and are just getting further into debt, you may have a debt problem that requires help from a Trustee.
What are my rights regarding Payday Loans?
Refer to the Financial Consumer Agency of Canada for a full list of your rights. Also see if the lender is following Ontario’s regulations with regards to the cost of borrowing; the maximum penalty if you default, and the “cooling off” period where you can cancel the loan with no explanation and not have to pay the fees associated with the loan.
Also be aware that a lender cannot:
- extend or renew your Payday Loan charging you more interest or fees, or
- ask you to transfer your wages directly to them for payment.
For further information contact the Ontario Ministry of Consumer Services at www.sse.gov.on.ca/mcs/en