Payday loans

What is a payday loan

A payday loan is a short-term loan with high fees. It's an expensive way to borrow money. It’s also called a high-cost loan and high-cost credit. You may borrow up to $1,500 and you may have up to 62 days to pay it back.

Payday loans are different from other loans because:

• you may only take them out for a short period of time, usually weeks
• you may qualify without a credit check
• you pay a flat fee instead of interest when you pay on time
• the lender organizes your loan payments around your payday schedule

You must pay back some or all of the loan when you receive your next paycheque. If you don’t pay on time, you’ll pay more fees and interest charges. This will increase your debt.

What options to consider before you get a payday loan

Make sure you’ll be able to pay the loan back on time and cover your regular expenses.

If you’re facing a financial emergency, you may consider:

• asking for more time to pay your bills
• cashing in vacation days
• asking for a pay advance from your employer
• getting a loan from family or friends

Get tips on what to do if you’re facing a financial emergency.

You may also consider other options that are less expensive than a payday loan such as:

• getting a loan or line of credit from your financial institution
• getting a cash advance on a credit card
• using overdraft protection on your chequing account
• asking your lenders for payment deferrals. This may include a mortgage payment deferral and a payment holiday on your credit card

Figure 1: Comparing the cost of a payday loan with other options (based on a $300 loan for 14 days)

The costs shown in this example are for illustration purposes only.

The assumptions in the example are:

• You borrow $300 for 14 days.
• A payday loan costs $14 per $100 that you borrow. This is the same as an annual interest rate of approximately 365%.
• A line of credit includes a $5 administration fee and an annual interest rate of 8%.
• Overdraft protection on a chequing account includes a $5 fee plus an annual interest rate of 21%.
• A credit card cash advance includes a $5 fee plus an annual interest rate of 23%.

Where to get a payday loan

Privately owned companies offer payday loans in stores and online. They must follow the rules set by the province or territory where they do business.

Each province sets its own rules about payday loans. The territories don’t have specific rules.

Contact your provincial or territorial Consumer Affairs office to learn more about payday lending rules.

Payday lenders must have a license to issue payday loans in your province or territory. Make sure you’re dealing with a licensed payday lender.

Your province or territory may have tools that allow you to check if a payday lender has a licence.

Select your province in the Consumer Hub to find tools and resources on payday loans.

Beware of online payday lenders located outside Canada. If you have problems with them, it may be difficult to resolve.

What to expect when you take out a payday loan

Here’s what you may expect if you’re considering getting a payday loan.

Applying for a payday loan

Generally, payday lenders will require proof that you have a:

• regular income
• bank account
• permanent address

Before giving you a payday loan, lenders may require that you:

• complete a form for pre-authorized debit, letting the lender withdraw payments, including fees, directly from your bank account, or
• provide a post-dated cheque for the total loan amount including fees

Learn more about pre-authorized debits.

Getting money from a payday lender

In most cases, the payday lender will deposit money in your bank account or give you cash.

In some cases, the payday lender may issue you a prepaid card. They also call these cash cards. It may cost extra to activate and use the card.

Paying back a payday loan

Some payday lenders require you to repay your loan at the same location where you got your loan. In most provinces, a payday lender can’t extend or roll over your payday loan. This usually means they can’t push back the due date and charge you a new fee. If you can’t pay it back on time, they may charge you interest.

Provincial laws prevent payday lenders from asking you to sign a form that transfers your wages directly to them.

Making sure you understand the agreement

The payday lender will ask you to sign an agreement. Each province has rules about what must be in the agreement.

It typically includes:

• the amount borrowed
• the fees
• the payment schedule
• the loan due date

Read your agreement carefully before you sign it. Ask the payday lender about anything you don’t understand.

How much a payday loan costs

Payday loans are very expensive compared to other ways of borrowing money.

This is because you:

• pay high fees
• may need to pay a fee if your cheque or pre-authorized debit doesn’t go through
• may pay interest if you don’t pay back the loan on time

These costs may make your loan harder to pay back. This may cause or increase financial difficulties and stress.

Before you get a payday loan, be sure that you can pay it back on time. Your debt may keep growing and you may end up paying a lot of money over time.

Fees and penalties

Many provinces regulate payday lending fees and penalties.

These include:

• Alberta
• British Columbia
• Manitoba
• New Brunswick
• Newfoundland and Labrador
• Nova Scotia
• Ontario
• Prince Edward Island
• Saskatchewan

In provinces where there are payday loan regulations:

• the maximum cost of borrowing is $14 for each $100 you borrow
• the payday lender may charge a one-time fee of $20 for a dishonoured cheque

In other provinces and territories, the maximum cost of borrowing is equal to the criminal interest rate of 35%. This means if you borrow money for 2 weeks, it costs you approximately $1.35 for each $100.

What happens if you can’t pay back a payday loan on time

You may have serious consequences if you don’t make your payments on time.

Depending on the laws in your province, these consequences may include the following:

• If you don’t have enough money in your bank account to cover your pre-authorized payday loan payment:
  • the payday lender may charge you a fee
  • your financial institution may charge an insufficient funds fee (NSF)
• The payday lender may charge you interest on the outstanding amount.
• The total amount that you owe, including the fees, may continue to increase.
• The payday lender may deal with a collection agency and this may appear on your credit report.
• The payday lender or collection agency may sue you for the debt.

Provincial laws define what a payday lender may do when trying to collect a loan. This includes when and how often the lender may contact you. It also includes what tactics the lender may use to get you to pay.

Contact your provincial or territorial Consumer Affairs office, for more information on debt collection.

If you don’t make your payday loan payments on time, you may get stuck in a debt trap.

Infographic: Payday loans: An expensive way to borrow money!

What you can do if you’re stuck in a debt cycle

You may face financial difficulties because you can’t pay your debts. Think carefully about the long-term consequences of getting a payday loan.

Seek advice from reliable sources to explore the different financial options that are available to you. Qualified professionals may help you find the best solution for your financial needs. Their advice is confidential, non-judgmental and often free.

Some options include:

• a financial advisor
• an accredited credit counsellor
• a licensed insolvency trustee or an insolvency lawyer

Learn more about options you can trust to help you with your debt.

Related Links

• What to consider before borrowing money
• Making a plan to manage your debt
• Personal loans
• Lines of credit
• How credit cards work