4.2.7 Payday loans

At times, you may be low on cash, with your paycheque still a couple of weeks away. You see a sign in the window of a store for a "payday loan." Is this a good idea?

Here's what you need to know about payday loans:

• A payday loan is a short-term loan
• You promise to pay back on or before your next payday
• You can borrow up to $1500
• You usually pay interest at very high rates on the total of the loan
• There are numerous fees if a payment does not go through

The costs shown in the example below are for illustration purposes only and are based on the following assumptions:

• A payday loan costs $17 per $100 that you borrow, which is the same as an annual interest rate of 442%
• A line of credit includes a $5 administration fee plus 8% annual interest on the amount you borrow
• Overdraft protection on a bank account includes a $5 fee plus 21% annual interest on the amount you borrow
• A cash advance on a credit card includes a $5 fee plus 23% annual interest on the amount you borrow

Comparing the cost of a payday loan with other types of short-term loans (based on a $300 loan for 14 days)

A payday loan is much more expensive than most loans offered by financial institutions. If a person cannot make the payment by the due date a $300 loan can up to more than $400 (with interest and fees) depending on the province.

Before you apply for a payday loan:

• Check out your other options
• Find out about all the fees and charges you will have to pay
• Calculate the amount that you are sure you can repay on the due date