Studies show that about eight percent of Canadians are frequent payday loan consumers. These loans are attractive to many people who have an urgent need for funds – including for car repairs, medical emergencies or even grocery shopping.
Unfortunately, payday loans can become a regular source of fast cash, leading to an on-going cycle of debt.
In fact, a recent study revealed that about 16 percent of individuals who file for personal bankruptcy owe money to one or more payday loan companies (an average of one month’s wages). Here are some reasons to steer clear of payday loans:
- Increased risk of repeated, costly loan rollovers: Unlike regular loans, payday loans are designed to be paid back in full on the agreed date. There is no option to repay in affordable instalments. Most people who need the emergency funds are not able to meet their monthly obligations if they repay the payday loan – so they are forced to borrow again. And the cycle begins.
- High interest rates: Payday loans typically impose high interest rates with APRs in excess of 300 percent. If you’re stuck in the loop for a whole year – renewing the loan every 2 weeks – you would end up paying 360 percent interest, in addition to the fee for loan roll-over.
- Higher fees: Payday loans have much higher fees compared to other loans. For instance, the maximum cost of every $100 payday loan in Ontario is $18 as per the Ontario Payday Loan Act – meaning that in Ontario, if you borrow $300 for two weeks, you would pay a $54 fee, compared to $2.65 for a credit card with an interest rate of 24 percent.
- Rollovers: About 80 percent of borrowers renew or roll over their payday loans within two weeks. If done several times within 3 to 4 months, the fee expenses exceed the amount borrowed. This happens to about 60 percent of payday loan borrowers who are caught in the payday debt trap.
- Extra fees: If you default on a payday loan, you will be charged extra bank fees, in addition to what you owe.
Generally, payday loans are a very expensive way to accumulate debt. While these loans seem like an easy solution, they often lead to financial stress if you’re unable to repay the loan.
Instead, consider other sources of funds, such as personal loans, savings, employer pay advances, or even credit cards with 0 percent introductory APR offers.