It seems like a quick, easy fix. You’ve found yourself short of cash until your next paycheque, so why not get a payday loan to carry you over?  These loans provide short-term funds or payday advances in small amounts. Typically, this type of loan is $1,500 or less for a maximum term of 62 days.   Money is advanced in exchange for a post-dated cheque or some other form of pre-authorized payment.  There are a multitude of companies to choose from who provide these loans.  They are usually within walking distance or you can easily apply on-line.

According to Statistics Canada, about 3% of Canadian families have obtained a payday loan. On average, Canadians borrow $300 for a two-week term – this doesn’t sound like an unmanageable amount.   The problem arises when you run short on funds again for your next pay.   So, you use your paycheque to pay  the first loan and then borrow a higher amount to cover the additional interest costs.   Consumers can find themselves in a cycle of perpetual borrowing, with no end in sight, as they depend more and more on these loans.

The issue is the high interest rates and fees.    Many payday lenders charge high fees and penalties for late payments.  One company website posts the annual interest rate at over 500%.  You would never consider paying a bank that interest rate for a loan.

In a case currently in the courts, a payday loan company has come under scrutiny in four provinces. In Ontario, the government wants to revoke their license alleging the fees they charge contravenes the province’s maximum cost of borrowing of $21 per $100 loan.

Government and consumer watch groups are not comfortable with these types of companies because of what they call “predatory” lending practices.  By offering loans to a segment of society who can’t get a bank loan or a credit card, these lenders know that their customers are repeat customers.  The Ministry of Consumer Services has recently issued a consumer alert on payday loans.

Remember, these companies are there to make money. If you decide to use this type of company ensure to read the terms and understand the fee structure including the interest rates, penalty fees, financing charges, etc.

Don’t get caught in the trap of continued borrowing. If you are having financial problems and can’t pay your bills, talk to a Trustee in bankruptcy to consider your options.

By Kathy Lenart – Insolvency Partner, Licensed Insolvency Trustee
CPA, CA, CIRP
Member and Secretary of the Ontario Association of Insolvency and Restructuring Professionals (OAIRP)
Canadian Association of Insolvency and Restructuring Professionals (CAIRP)