Top five things to consider before you take out a payday loan

Top five things to consider before you take out a payday loan

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Being strapped for cash between paycheques can be a challenge, so it may be tempting to take out a loan from a payday lender just to make it through the month. 

A payday loan is a short-term loan, up to $1,500 for most, that requires repayment within 62 days in Alberta, British Columbia, Ontario, Manitoba and New Brunswick. Some outlets require you to complete a form that allows them to withdraw the payment out of your bank, or they may require a post-dated cheque to complete the transaction. Usually you’ll be required to show proof of employment with a paystub and permanent address before they agree to loan you money.

The cash is either given over the counter or deposited into your bank. This sounds convenient enough, but becoming reliant on payday loans every month can lead to a spiral of expensive debt that is hard to recover from.

Here’s the top five things to consider before you take out a payday loan:


They’re expensive!

Payday lenders often charge incredibly high fees and interest rates on their loans that increase the amount you pay back. For example, for every $100 you borrow, you’ll be required to pay back $117, which is equivalent to an annual interest rate of 442 per cent. That’s significantly higher than the 21 per cent interest usually charged on a cash advance on a credit card or overdraft. 

These fees and penalties increase significantly if you are unable to pay back the loan within the agreed terms. So if you plan on taking out a payday loan, be sure you can pay it back on time or else you could find yourself more stressed out because you owe more money than you budgeted for. These outlets also offer cheque cashing services which are also very expensive.

Read the fine print

When you apply to receive a payday loan, you’ll be required to sign an agreement of terms. Make sure you read this agreement carefully before signing and ask for clarification about anything you don’t understand. This agreement details interest rate, fees, due date, and overall cost of the loan. Each province has its own rules governing payday lenders. To learn about the rules in your province, visit this Government of Canada website.

Beware of online unlicensed lenders

Like any online transaction, you should be wary of providing your information through a website, especially for payday lenders. Borrowing money from an online payday lender is risky because they may not be licenced or regulated in your area giving them free reign over their terms and charges. Some websites will collect your information and give it to another payday lender. To find out if the lender you are considering is licenced, visit your local consumer affairs office.  You should only use a licenced lender.

If you don’t pay, there could be serious consequences

Consequences of not paying back a payday loan within the time frame you agreed to can be severe. If your payment bounces, you will face increased fees from the lender and your bank. The amount you owe will only continue to increase until it’s paid in full. They may send your account to a collection agency which charge their own fees. It may also then be added to your credit bureau. You could be sued for the money you owe, or your assets could be seized. You may also be taken to court and have your wages garnished. In some cases, the lenders may call your friends, family or employer in an attempt to get their money. This will most certainly cause a great deal of stress for you, especially if you need to borrow money from another source to pay it off. The spiral of debt will continue to grow, so be certain you can pay it back on time.

Ask the right questions

Before borrowing from any lender, be sure you fully understand all of the terms so you aren’t surprised by the unknown. Ask what the total amount of borrowing will be, any associated fees, the maximum fees, consequences if you can’t pay it back on time, fees for insufficient funds, what the “cooling off period” is in your area (which allows you to cancel your loan without penalty or fees, under the law in your province), and the date your loan is due. Be sure to get a copy of the agreement you sign and keep it in case there are any issues. If they won’t give you a copy of the agreement, don’t borrow from them.

Explore all your options

Before visiting a payday lender, be sure you have exhausted other money lending options that are less expensive with gentler terms. Talk to your bank about a personal loan, consider a line of credit, a cash advance on a credit card, cash in vacation days at work or talk to your employer about an advance on your wages. You could even sell your old things to make some extra cash to get you by.

If you are already struggling with debt, getting in deeper will not help. Backing yourself into a corner to pay your debts can have serious consequences in all aspects of your life, especially your mental health. It’s okay to ask a professional for advice on how to get yourself out of debt to take control of your financial future.

The Debt Relief Specialists at Browmich+Smith can offer personalized solutions to help you rebuild your worth – our programs can help you restructure debt and get out of the spiral of pay day loans. We offer free confidential consultations without obligation. For more information, call 1.855.884.9243.




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