Payday loans

From: Financial Consumer Agency of Canada

What is a payday loan

A payday loan is a short-term loan with high fees that make it a very expensive way to borrow money. You can borrow up to $1,500. You must pay the loan back from your next paycheque.

In the following provinces, you have up to 62 days to pay it back:

  • Alberta
  • British Columbia
  • Manitoba
  • New Brunswick
  • Ontario

If you can’t pay it back on time, you'll face more fees and interest charges. This will increase your debt.

Payday loans are meant to cover a cash shortfall until your next pay or for a short period. Avoid using them for ongoing costs such as rent, groceries or utility bills. If you use them in this way, you may end up in financial trouble.

Privately-owned companies offer payday loans in stores and online.

What to expect when you take out a payday loan

Here’s what you can expect if you’re considering taking out a payday loan.

What you need to provide a payday lender

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

  • regular income
  • bank account
  • permanent address

Before giving you a payday loan, payday lenders will require you to do one of the following:

  • fill out a form that will allow the lender to withdraw the total loan amount, including fees, directly from your bank account when the loan is due (also called a pre-authorized debit)
  • provide a post-dated cheque for the total loan amount including fees

Be careful when providing your banking information to a payday lender, as they will have access to funds in your account.

Getting money from a payday lender

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

However, in some cases, the payday lender may ask you to take the loan on a prepaid card. 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 several provinces, a payday lender can’t extend or roll over your payday loan.

Make sure you understand the agreement

The payday lender will ask you to sign an agreement that shows your loan costs, including interest, fees and the due date. Read this document carefully before signing it. Ask the payday lender about anything you don’t understand.

Find out your province or territory’s payday lending rules by contacting your provincial or territorial consumer protection office.

Online payday loans

Payday lenders may operate in a physical location or online. Be careful with online payday lenders, many aren't licensed and don't follow provincial rules designed to protect borrowers. You should only use licensed online payday lenders.

Contact your provincial or territorial consumer affairs office to verify that a payday lender holds a license.

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

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.

How much payday loans cost

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

This is because:

  • you pay high fees
  • the cost may be equivalent to an interest rate of 500-600%
  • you may have to pay a fee if your cheque or pre-authorized debit doesn't go through

These high costs can make your loan harder to pay back, which can increase your financial difficulties and stress.

Before taking out a payday loan, be very sure that you can pay it back on time. If not, your financial situation may get worse. Your debt can keep growing and you can end up paying a lot of money over time.

Figure 1: Comparing the cost of a payday loan with a line of credit, overdraft protection on a chequing account and a cash advance on a credit card (Based on a $300 loan for 14 days)

Graphic demonstrating the high cost of payday loans compared to other credit options
Figure 1 - Text version
Type of loan Cost
Line of credit $5.92
Overdraft protection on a bank account $7.42
Cash advance on a credit card $7.65
Payday loan $51.00

Source: Financial Consumer Agency of Canada

The costs shown in this example 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

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

There can be serious consequences if you don’t repay your loan by the due date.

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

  • the payday lender may charge you a fee if there isn’t enough money in your account
  • your financial institution may also charge you a fee if there isn’t enough money in your account
  • the total amount that you owe, including the fees, will continue to increase
  • the payday lender could call your friends, relatives or employer in attempts to contact you to collect the money
  • the payday lender could deal with a collection agency and this could be included on your credit report
  • the payday lender or collection agency could sue you for the debt
  • the payday lender or collection agency could seize your property
  • the payday lender could go to the courts to take money from your paycheques (also called garnishing your wages)

If you can’t make your payday loan payments on time, it can be easy to get stuck in a debt trap.

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

Infographic - Text version

The infographic Payday loans: An expensive way to borrow money! is illustrating an example of what can happen when you take out a payday loan.

You need $300 for household repairs. You get a $300 payday loan for 2 weeks. Over the 2-week period, you’ll pay $51 in charges, which is equivalent to a yearly interest rate of 442%. You owe $351.

If you don’t make your payment, you’re charged a $40 penalty. You now owe $391.

Before you make a decision, explore your options.

This example is for illustration purposes only. The $51 in charges is based on a cost of $17 per $100 borrowed. In provinces and territories where the cost is regulated, the maximum a Payday lender can charge is between $15 and $25 per $100 borrowed. Where the cost is not regulated, it can be higher. Penalty fees vary across provinces. Contact your provincial or territorial consumer affairs office for details.

canada.ca/money

Options to consider before getting a payday loan

Will you be able to pay the loan back on time and cover your regular expenses? If not, consider the following other options that are less expensive than a payday loan.

Cheques and hold periods

When you deposit a cheque in person at your bank, you have immediate access to the first $100 of all the money you deposited. You’ll have access to the $100 on the next business day if you make the deposit in any other way, such as at an ATM. If the cheque is for $100 or less, the bank must provide you with the entire amount.

Learn more about accessing money when you deposit a cheque.

Cashing a Government of Canada cheque for free

Cashing your CERB or CESB cheque

The Government of Canada has temporarily increased the cheque-cashing limit to $2,000 for emergency benefits-related cheques to individuals.

You have the right to cash your Government of Canada cheque for free at any bank. You can do this even if you're not a customer of that bank. Your cheque must be for $1,500 or less. You need to show one piece of identification with both your photo and your signature, such as a driver’s license.

Learn more about cashing a Government of Canada cheque.

Ask for more time to pay your bills

Consider contacting the people or businesses that you owe money to. Ask for more time to pay your bills. Tell them when you get paid and offer to write a post-dated cheque for that day.

Get tips on what to do when dealing with the people or businesses that you owe money to.

Consider cheaper ways of borrowing money

If you need the money immediately, look into less expensive alternatives.

For example:

  • cashing in vacation days
  • asking for a pay advance from your employer
  • getting a loan from family or friends
  • getting a line of credit from your financial institution
  • getting a cash advance on a credit card
  • getting a personal loan from your financial institution

Lines of credit

A line of credit allows you to withdraw money whenever you want, up to a certain credit limit. You pay interest on the amount you borrow until you pay it back in full.

Learn about how lines of credit work.

Cash advances on a credit card

Unlike purchases, when you take a cash advance on a credit card, you’re charged interest right away. However, the interest rates you pay are much lower than with payday loans.

If you don’t have a credit card and you’ve had credit problems in the past, you may be able to get a secured credit card from a bank or other financial institution.

Get information on fees you’ll pay on a credit card cash advance.

Get information on secured credit cards.

Personal loans

Personal loans let you borrow a fixed amount of money. You must pay back the loan, plus interest, over a fixed period of time.

Learn more about the terms and conditions of getting a personal loan.

If you're stuck in a debt cycle

If you’re already having trouble making ends meet because you can’t make the payments on your debts, think carefully about the long-term consequences of taking out a payday loan.

Seek advice from reputable sources to explore the different financial options that are available to you. There are qualified professionals who can help you find the best solution for your financial needs. This 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 how to get help with debt.

What to ask a payday lender

Ask the payday lender about the total cost of borrowing when you first apply for the loan.

Be sure to find out:

  • all the fees, charges and interest
  • the date the loan is due
  • if there is a maximum cost you can be charged for a payday loan

Ask about fees applied if you’re unable to pay back your loan on time.

Understand that:

  • a fee is often charged if your cheque or pre-authorized debit is returned due to non-sufficient funds
  • these fees can range from $20 to $50
  • many provinces have rules about maximum fees for non-sufficient funds
  • the amount can be much higher in provinces and territories where the fee is unregulated

Ask if there is a “cooling off” period. This is a period, often a day or two, during which you can cancel the loan with no explanation and without paying any fees. The laws in many provinces protect this right. Make sure to get the “cooling off” period information in writing from the payday lender.

Ask for a copy of the loan agreement.

Make sure you:

  • read this document carefully before signing it
  • understand the total cost of the loan
  • keep a copy for your records so that you have something to refer to if there’s any problem
  • don’t sign for the loan if the lender won’t give you a copy of the agreement

Payday lending rules where you live

The rules and regulations for payday loans may change depending on where you live.

The territories don’t have specific rules, contact your territorial consumer affairs office for key details.

License

Most provinces require a payday lender to have a license.

If you’re unsure that a payday lender holds a license, contact your provincial consumer affairs office.

Fees and penalties

Many provinces regulate payday lending fees and penalties.

Table 1: Payday lending regulations by province
Province Maximum cost of borrowing for a $100 payday loan Cooling off period to cancel the payday loan Maximum penalty for a returned cheque or pre-authorized debit
Alberta $15 2 business days $25
British Columbia $15 2 business days $20
Manitoba $17 48 hours, excluding Sundays and holidays $20
New Brunswick $15 48 hours, excluding Sundays and holidays $20
Newfoundland and Labrador $21 2 business days $20
Nova Scotia $19 Next business day (2 days for online payday loans) $40 (default penalty)
Ontario $15 2 business days n/a
Prince Edward Island $25 2 business days n/a
Saskatchewan $17 Next business day $25

Restrictions

In the following provinces, a payday lender can’t extend or roll over your payday loan:

  • Alberta
  • British Columbia
  • New Brunswick
  • Nova Scotia
  • Ontario
  • Saskatchewan

A payday lender can’t ask you to sign a form that transfers your wages directly to them in the following provinces:

  • Alberta
  • British Columbia
  • Manitoba
  • New Brunswick
  • Nova Scotia
  • Ontario
  • Saskatchewan

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

These laws exist in the following provinces:

  • Alberta
  • British Columbia
  • Manitoba
  • New Brunswick
  • Nova Scotia
  • Ontario
  • Saskatchewan
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