Top five things to consider before you take out a payday loan
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By Bromwich+Smith Staff | 1621 words | Reading Time: 8 minutes | Last update: 2023/10/16
Being strapped for cash between paycheques can be difficult, so it may be tempting to take out a loan from a payday lender just to make it through the month. Payday loans, often advertised as a quick and simple solution, offer a small lump sum of money- typically no more than $1500 for a short period, with repayment required within a small time period, often your next pay period or up to 60 days depending on where you live. To obtain a payday loan, you may be required to provide proof of employment, a paystub, and a permanent address. While these loans may seem like a simple solution for a short term they come with severe consequences including a cycle of expensive debt and we strongly suggest avoiding them at all costs.
Payday Loans Are Expensive!
Payday loans may offer a fast solution to financial problems, but they come with a hefty price tag. Ultimately, payday loans come with high fees and interest rates. For example for every $100 you borrow, you could be required to pay back $117, equivalent to an annual interest rate of a staggering 442 percent. This rate is significantly higher than the 21 percent interest usually charged on a cash advance from a credit card or overdraft.
These fees and penalties can grow quickly if you fail to repay the loan within the agreed-upon terms. Borrowers who find themselves unable to meet the repayment deadline may face even higher costs, causing financial stress to snowball. Often, customers of these stores find themselves paying off the debt only to reborrow money right away.
Read the Fine Print
Before signing any loan agreement, it's imperative that you thoroughly read the fine print. The loan agreement contains critical information, including the interest rate, fees, due date, and the overall cost of the loan. Failing to understand the terms and conditions can lead to unpleasant surprises down the road.
Each Canadian province has its own set of rules and regulations governing payday lenders. To ensure that you're well-informed about the rules in your province, it's advisable to visit the Government of Canada website or contact your local consumer affairs office for support.
Beware of Online Unlicensed Lenders
You may have noticed a surge of online payday lenders, and online advertisements. While the idea of a simple loan with funds being deposited right into your account may be enticing, borrowing from online payday lenders carries significant risks, even more so with unlicensed and unregulated companies. These lenders may not adhere to the same standards and regulations as their brick-and-mortar counterparts, giving them the freedom to set their own terms and charges.
What If You Can’t Pay Back The Loan?
Failing to repay a payday loan within the agreed-upon timeframe can result in severe financial repercussions.
Increased Fees: If your payment bounces, you may face additional fees including NSF from both the lender and your bank, causing the debt to grow.
Collection Agencies: The lender may send your account to a collection agency, which can add its own fees to the debt, as well as added stress. Often customers find themselves looking at payday loans to avoid collection calls- not the other way around!
Negative Impact on Credit: Non-payment can lead to a decrease on your credit report, lowering your credit score.
Legal Actions: Lenders like any other creditor have the option to take legal action against you to recover the money owed.
Wage Garnishment: In some cases, they may seek court orders to garnish your wages, reducing your take-home pay and continuing the debt cycle even further.
Personal Stress: Debt collection efforts can extend to contacting your friends, family, or employer, causing personal distress and embarrassment.
Ask the Right Questions
Before borrowing from any lender- payday loan or otherwise, it's important to ask the right questions to fully understand the terms and avoid unexpected surprises.
Total Borrowing Costs: What will be the total amount you need to repay, including fees and interest?
Maximum Fees: Are there any maximum fees accompanying the loan?
Consequences of Late Payment: What are the penalties if you can't repay the loan on time?
Insufficient Funds Fees: How much will you be charged if your payment bounces due to insufficient funds? Will they attempt to take payment out more than once, potentially allowing for more than one NSF charge?
Cooling-Off Period: Does your province have a cooling-off period, allowing you to cancel the loan without penalties within a specified timeframe?
Due Date: When is the loan due, and am I able to change the payment date if needed ie my pay dates changed can I move the payment from the 10th to the 15th?
Consequences of Early Repayment: Will there be a penalty if I am able to repay the loan prior to the repayment date?
Always request a copy of the loan agreement and keep it for your records. If a lender refuses to provide a copy of the agreement, consider it a red flag and explore other borrowing options.
Explore All Your Options
Before turning to a payday lender, it's essential to consider all other borrowing options that offer more favorable terms.
Personal Loan: Speak with your bank or credit union about obtaining a personal loan with lower interest rates and more manageable repayment terms. We understand that this may not be an option for everyone and do not feel defeated if it is not an option for you currently. There are other options that can support your current situation!
Line of Credit: If you have an established line of credit, consider using it for short-term financial needs.
Cash Advance on a Credit Card: Check if you can obtain a cash advance on your credit card, which may come with lower interest rates than payday loans- this is not ideal for everyone and ensure you understand the costs associated with this option.
Vacation Days or Wage Advances: Some employers offer the option to cash in vacation days or provide advances on wages, allowing you to access funds without high fees.
Sell Unneeded Items: Consider selling items you no longer need to generate extra cash. Explore options to temporarily increase your income to offset the expenses you are needing to pay.
Seek Financial Advice: Explore alternative options like a Bankruptcy or Consumer Proposal and develop a comprehensive financial plan. Speaking to a debt relief specialist will help you understand all of your financial options.
Taking Control of Your Financial Future
While payday loans may appear to be a quick fix for financial emergencies, it's crucial to be fully aware of their high costs and potential consequences. Before taking out a payday loan, explore alternative borrowing options, ask the right questions, and read the fine print. Remember that licensed lenders are a safer choice, and if you find yourself trapped in a cycle of payday loans, seek professional advice to regain control of your financial future.
At Bromwich+Smith we understand the challenges of managing your finances, especially when faced with unexpected expenses. Our Debt Relief Specialists are here to help you regain control of your financial future. We offer personalized solutions and free consultations to assess your unique situation and provide guidance on escaping the payday loan cycle. Don't let the burden of payday loans overwhelm you; reach out to us today for expert financial advice and support.
FAQs Related to Payday Loan:
1. What are the key drawbacks of payday loans?
Payday loans come with high fees and interest rates, often reaching an annual rate of 442 percent for a $100 loan. They can lead to a cycle of expensive debt, causing financial stress to snowball.
2. What should I consider before signing a payday loan agreement?
Before signing, carefully read the fine print of the loan agreement. It contains crucial details such as interest rates, fees, due dates, and the total cost of the loan. Understanding these terms is essential to avoid unpleasant surprises.
3. What risks are associated with borrowing from online payday lenders?
Online payday lenders, especially unlicensed ones, pose significant risks. They may set their own terms and charges, lacking the standards and regulations of brick-and-mortar lenders. Caution is advised when considering loans from online sources.
4. What are the potential consequences if I can't repay a payday loan on time?
Failing to repay on time can result in increased fees, involvement of collection agencies, negative impacts on credit, legal actions, wage garnishment, and personal distress. It's crucial to understand the severe financial repercussions.
5. What questions should I ask before borrowing from any lender, including payday loans?
Ask about total borrowing costs, maximum fees, consequences of late payment, insufficient funds fees, cooling-off periods, due dates, consequences of early repayment, and always request a copy of the loan agreement for your records.
6. Are there alternatives to payday loans that I can consider?
Yes, explore options like personal loans from banks or credit unions, using an established line of credit, obtaining a cash advance on a credit card, utilizing vacation days or wage advances from employers, and selling unneeded items. Seeking financial advice from debt relief specialists can also provide comprehensive solutions.
7. Why is it important to borrow from licensed lenders?
Licensed lenders adhere to regulations and standards, providing a safer borrowing experience. If a lender is unwilling to provide a copy of the loan agreement, it's a red flag, and exploring other borrowing options is advisable.
8. How can I regain control of my finances if I'm trapped in a cycle of payday loans?
Seek professional advice from Debt Relief Specialists, such as those at Bromwich+Smith. They offer personalized solutions and free consultations to help assess your unique situation and guide you in escaping the payday loan cycle.
9. What steps can I take to manage unexpected expenses without resorting to payday loans?
Consider creating a financial plan, exploring bankruptcy or consumer proposals, and speaking to a debt relief specialist for guidance. Additionally, assess alternative borrowing options with lower interest rates and more favorable terms.
WITH GRAPHIC: Source - https://www.canada.ca/en/financial-consumer-agency/services/loans/payday-loans.html