Payday loans are a dangerous borrowing vehicle. I’m going to provide you with two statistics that may or may not surprise you: One in 10 people admit to using a payday loan or short-term loan and one in four people who file bankruptcy or a consumer proposal use payday loans.
You might think a payday loan is a short-term fix for your current financial problems but payday loans make things far worse.
Consider this example: Your car gets a flat tire and you don’t have the money to pay for repairs so you decide to borrow $300 on a payday loan for two weeks. You need the car to get to work, so it seems reasonable to borrow money just once on a payday loan to cover the shortfall.
There are a couple concerns and risks with this scenario.
First, there’s the true cost of that loan. In Ontario, the maximum charge for a payday loan in 2017 is $18 per $100. That might seem like 18% interest, but it’s not. The $18 ‘fee’ is for use of the money for just two weeks. To compare to credit card rates, you need to calculate a comparable annual rate for borrowing that money. Running some simple math, the average interest rate on a payday loan in Ontario is 26 weeks x $18 or 468%!
But, you say, I’m only going to borrow for two weeks so it’s no big deal. Yes, it is and here’s why. If you borrow $300 for two weeks, at the end of two weeks you must repay $354. The truth is you’ve turned to a payday loan because you were short of cash in the first place. People who turn to payday loans tend to be living paycheque to paycheque.
Taking out a payday loan just postpones the cash flow problem for a week or two, creating a cycle of continuous payday loan borrowing. The more money you borrow, the more money you lose in interest. That’s why the average client we see at Hoyes, Michalos ends up with more than three payday loans outstanding at one time, consuming more than their entire paycheque.
If you are short of cash, what are your alternatives to payday loans? Consider these options instead:
- Negotiate to pay your bill or rent over a few weeks;
- Pay with your credit card if you have room. Even a cash advance is cheaper than a payday loan;
- If you have an emergency fund, use it. If you don’t, start planning to have one equal to any payday loan you might be tempted to take out;
- Get overdraft protection on your bank account. Again, the cost can be cheaper than payday loans;
- Find a way to earn some extra money. Sell something, work overtime, or anything to raise the money you need to avoid a payday loan; or
- Ask friends or family for help. Tell them it’s temporary, and again, make a plan to repay them a few dollars a week.
If you’re turning to payday loans because your credit cards and other debts are tapped out, and need payday loan help, talk to a licensed insolvency trustee about your options. It might be time to reduce your debt and repair your budget, so you don’t have to rely on payday loans in the future.