Beware of unlicensed payday lenders
Before you get a payday loan, make sure you are dealing with a licensed payday lender. Contact your provincial or territorial consumer affairs office for information on licensed payday lenders.
What is a payday loan
A payday loan is a short-term loan with high fees that make it an expensive way to borrow money. It is 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 traditional 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 face more fees and interest charges. This will increase your debt.
What options to consider before getting 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
You may also consider other options that are less expensive than a payday loan:
- 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 including a mortgage deferral and a payment holiday on your credit card
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)
Text version: figure 1
|Type of loan||Cost|
|Line of credit||$5.92|
|Overdraft protection on a chequing account||$7.42|
|Cash advance on a credit card||$7.65|
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 chequing 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
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.
Payday lenders must have a license to issue payday loans in your province or territory. Make sure you are dealing with a licensed payday lender.
Your province or territory may have tools that allow you to check if a payday lender holds a licence.
Beware of online payday lenders located outside Canada. If you have problems with them, it may be difficult to resolve.
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
- you may have to pay a fee if your cheque or pre-authorized debit doesn’t go through
- you may pay interest if you don’t pay back the loan on time
These costs may make your loan harder to pay back, which may cause or increase financial difficulties and stress.
Before taking out a payday loan, be sure that you can pay it back on time. If not, your financial situation may get worse. 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.
|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||$14||2 business days||$20|
|Nova Scotia||$17||Next business day (2 days for online payday loans)||$40 (default penalty)|
|Ontario||$15||2 business days||$25|
|Prince Edward Island||$15||2 business days||n/a|
|Saskatchewan||$17||Next business day||$25|
What to expect when you take out a payday loan
Here’s what you may expect if you’re considering taking out 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 you to do one of the following:
- fill out a form that will allow the lender to withdraw the payment amounts, including fees, directly from your bank account when they are due (also called a pre-authorized debit)
- provide a post-dated 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.
In some cases, the payday lender may issue you a prepaid card. These are also called 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.
Provincial laws prevent payday lender 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:
- amount borrowed
- payment schedule
- loan due date
Read your agreement carefully before signing it. Ask the payday lender about anything you don’t understand.
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:
- the payday lender may charge you a fee if you don’t have enough money in your account
- your financial institution may also charge you an insufficient funds fee (NSF) if you don’t have enough money in your account
- the payday lender may charge you interest on the outstanding amount
- the total amount that you owe, including the fees, will 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.
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!
Text version: infographic
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 pay 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. The maximum a Payday lender can charge, including any penalty fees, varies across provinces. Contact your provincial or territorial consumer affairs office for details.
What you can do if you’re stuck in a debt cycle
You may have trouble making ends meet because you can’t pay 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. 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
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