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. 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. 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
  • a bank account
  • a 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-dates cheque for the total loan amount including fees

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.

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.

How much payday loans cost

Payday loans are very expensive compared to other ways of borrowing money. This is because:

  • you pay high fees
  • you're charged a higher interest rate than on a regular loan or line of credit
  • 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 within two weeks. 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 $5.81
Overdraft protection on a bank account $7.19
Cash advance on a credit card $7.42
Payday loan $63.00

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 $21 per $100 that you borrow, which is the same as an annual interest rate of 546%
  • a line of credit includes a $5 administration fee plus 7% annual interest on the amount you borrow
  • overdraft protection on a bank account includes a $5 fee plus 19% annual interest on the amount you borrow
  • a cash advance on a credit card includes a $5 fee plus 21% 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. They may include:

  • the payday lender will 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 accumulate interest
  • the payday lender could call your friends, relatives or employer in attempts to contact you to collect the money
  • the payday lender could sell the loan to a collection agency and this could appear 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 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.

Figure 2: Payday loans: Make sure you pay on time!

Payday loans : Make sure you pay on time! infographic – see long description
Figure 2 - Text version

The infographic Payday loans: Make sure you pay on time! is illustrating an example of what can happen when you take out a payday loan and you don’t pay on time.

You need $300 for car repairs. You get a $300 payday loan for 2 weeks. Over the 2-week period, you’ll pay $63 in charges. Which is equivalent to a yearly interest rate of 546%. You owe $363

If you don’t make your payment, you’re charged a $40 penalty. You now owe $403

What happens now? (with an image of a man pulling his hair)

The lender can sell your loan to a collection agency to recover what you owe, which can hurt your credit score.

The lender or collection agency can sue you for the money you owe. Your wages could be garnished.

Before you make a decision, learn more about your options at itpaystoknow.gc.ca​

This example is for illustration purposes only. Some provinces regulate the maximum costs for payday loans.

Contact your provincial consumer protection authority for details.

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

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

Each province and territory has different rules and restrictions around payday lending. However, you need to be careful with online payday lenders, many are not licensed and don't follow provincial rules designed to protect borrowers.

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, 2‑week 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 $23 Next business day $20
Manitoba $17 48 hours, excluding Sundays and holidays $20
New Brunswick n/a 48 hours, excluding Sundays and holidays $40 (default penalty)
Nova Scotia $25 Next business day $40 (default penalty)
Ontario $18 2 business days n/a
Prince Edward Island $25 2 days n/a
Saskatchewan $23 Next business day $50

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
  • Nova Scotia
  • Ontario
  • Saskatchewan

For more information about what rules apply to payday lenders or to make a complaint, contact your provincial or territorial consumer protection office.

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