When you need money quickly, payday loans are promoted as a quick fix. Many consumer advocacy organizations advise against applying for this kind of loan and to only do so as a last option if you are confident in your ability to make the repayments.  A payday loan is an amount of money that a lender advances to you with the understanding that you will pay it back with interest when you receive your next paycheck. Typically, a payday lender will ask for the money back two weeks or more after you receive the payout. However, there are risks involved with borrowing money from payday loan businesses.

High-interest rate

In most areas of Canada, you are able to take out a payday loan for a lump sum of money (typically $100 to $1,500 maximum). Normally, this type of loan comes with quick approval, simple criteria, and a short repayment period of 14 days. You are required to repay the complete loan, plus interest and fees, once your term is over. Payday loans in Canada have much higher annual percentage rates (APR) than other loan categories. APR is the interest rate and other fees for a loan stated as an annual cost. It helps you compare the costs of various kinds of loans and gives you a more accurate picture of what a loan will cost.

The normal range of payday loan APRs is between 390% and 780%, with many loans hovering around the 540% APR level. Take, for instance, an Ontario payday credit for $900 with a $135 borrowing fee ($15 added for every $100 loaned). Your APR would be 391.07% if your payback period was 14 days. That’s extremely high.

Repeating Debt Circle

The debt cycle that payday loan consumers could develop is another problem. It goes without saying that there are payday loan lenders who assist in keeping customers’ debt from escalating and becoming an issue, but it’s very easy for people to fall into a cycle that they find difficult to break. Even though the majority of payday loans are for smaller amounts, people who have no other choices often find themselves taking out new payday loans to make up for the financial shortfall they experienced the previous month. As the high-interest rates associated with the loan are factored into the debt situation, the shortfall only gets worse. That is, the higher the interest rate of a debt, the easier it is to default because paying fully will become a burden.

Rollovers make you accumulate more debt.

When a payday loan is due and you are unable to pay the entire amount, some lenders will enable you to pay only the initial fee in order to extend the due date. But then the principal is increased by another fee in the same amount. For instance, if you borrowed $200 and were charged a fee of $15 for every $100 loaned, your next payday’s payment would be $230. If you choose to make the $30 fee payable to extend the debt, the lender will charge you another $30 fee the following payday, and so on. Without realizing it, you might find yourself shelling out almost $100 in expenses.

Simple or no credit checks

Some payday loan companies do not properly examine the credit histories of their applicants, and some even entice borrowers with bad credit to use their services even if they are insecure financially. Oftentimes, overnight loans can be approved and funds deposited into your account in just a few minutes. This is so because the majority of payday loan providers don’t need to know a lot about you before approving you. Therefore, it is more enticing for someone in need to depend on payday lenders to help them get through the month, and the cycle continues like that.

Payday loan doesn’t solve big financial problem

Online or in-person payday loans usually have a cap of $500 to $1500. Therefore, don’t count on this kind of loan to help you get out of debt forever or to cover large expenses like a new roof. They may not be able to resolve major financial problems, but they may develop into major financial problems.

Avoid payday loans where possible

The Financial Consumer Agency of the Canadian government has a wealth of payday lending advice, which basically boils down to avoiding it at all costs. Money is difficult to live without, so people who are in a financial emergency sometimes find it difficult to understand that taking out a payday loan they can’t afford to repay will only put the issue off for a few weeks or months. 

Instead of being locked up in the cycle of payday loans, there are options to help you pay off your unsecured loans while you enjoy peace of mind. When you speak with one of our debt experts at EmpireOne Credit, you could reduce your debt by up to 80%, and all interest stops immediately. We take our time to listen to you and also analyze your financial situation so we could recommend the best debt repayment plan that will suit your situation. We offer a friendly and free consultation. Reach out to us at (416) 900-2324 or fill out the form on this page to schedule a free consultation. Debt-free feels good.