Understanding payday loans

Image result for pay day loans

Payday loans are wide-spread in North America, but also in the UK and Australia. A payday loan is a cash advance against a paycheck. This is usually obtained from a payday store instead of a traditional bank. A few banks in Canada actually started offering this type of service, the main difference being in the interest rate charged.

A payday loan is short-term by nature. In Canada, the length is less than 62 days. The amount lent is a portion of your income, to a maximum of $ 1 500.00. It has to be reimbursed when your next paycheck comes in; the paycheck is a collateral. This type of loan is very easy to obtain, and this is the main danger. Most people do not realize or understand the actual percentage of interest they are charged or how the interest is calculated.

Payday stores usually charges between $ 10 to $ 35 on each $ 100 your borrow. For simplicity, let’s say you need $ 100 and the cost of borrowing for  10 days -until your pay is deposited- is $ 20. You think the interest is 20%? Not exactly. It is 20% for 10 days. Translated into a yearly rate, it is around 730%!!

Did you know the maximum percentage of interest a lender can charge in Canada is 60% and 35% in Quebec? Most provinces also have a cap. Here, for example, it is 23%. Payday stores have managed to bypass the law by charging “fees” instead of interests.

The main issue with payday loans is that most people are not able to repay them by the due date. If you need a payday loan in the first place, you definitely have a cash flow problem. Chances are you will need another loan by the time your next paycheck rolls in. It makes you the ideal customer.

In BC, if you can’t repay your loan on time, the lender can then charge you 30% interest on the principal, as well as administrative fees. Even a credit card won’t charge that much.

Payday loans are a terrible idea and need to be avoided, period. If you are strapped for cash you need to do  a thorough review of both your expenses and income. Trimming your expenses and earning more are your best options to stay out of the payday loan vicious circle.

 

2 thoughts on “Understanding payday loans

    • Stephanie says:

      Thanks for stopping by! I think people taking payday loans are in a vicious circle. They can’t even live paycheque to paycheque. Having an emergency fund is probably not even a remote possibility.

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s