A payday loan is a short-term loan designed to provide you with some extra money until your next paycheque. Typically speaking, a payday loan is limited to 30% of your take-home pay. You are expected to pay back this loan once your next paycheque arrives by providing the payday loan provider with a post-dated cheque.

While a payday loan doesn’t require credit approval, it is one of the most expensive ways to borrow money, with interest rates of over 500% (for a 14-day loan). In addition, be cautious of rollover loans which, for a fee, allow you to increase your existing payday loan or take out a new loan to pay off an old one. You will be burdened with high interest and an ongoing cycle of debt repayment, as opposed to a permanent solution to your debt challenges. To learn more about the rules and regulations surrounding payday loan companies, visit the Canadian Consumer Finance Association.

There are many organizations that present ‘debt management programs’ as a solution to your debt challenges. In reality, these organizations essentially attempt to negotiate an informal debt settlement on your behalf for a fee. You would sign a contract with a debt consultant who will then work with your unsecured creditors on reducing your interest rate and how much you owe while extending the time period you have to pay back debts. You will then provide a monthly payment to your debt consultant directly, who will take care of paying back your creditors until all of your debts are resolved.

While this may sound similar to some of the other options we will explore with you, debt management companies must be looked at carefully. The upfront fees a debt consultant will charge you may not be regulated in your province and may vary greatly between different organizations. Be sure to review your contract carefully before signing so you understand all possible fees, as well as the repayment plan and schedule. Just as with an informal debt settlement, your creditors have no obligation to participate in the informal proposal your debt consultant drafts. In comparison, a Consumer Proposal, administered by a Government Licensed Insolvency Trustee like MNP, is legally binding on all of your creditors.

Many Canadians use credit cards on a regular basis — but have you ever considered what a credit card actually is? Essentially you are borrowing money from your financial institution, with the intent of paying it back within a specific timeframe. Failure to pay off your entire balance results in high interest rates (around 19% or more) on the remaining balance, while a failure to make your minimum payments may hurt your credit score, increase your interest rate, cause you to incur fees or even have your card cancelled.

If a creditor offers you the option to extend your credit limit, consider the offer carefully. Are you able to currently make your minimum credit card payments? If no, an increased credit limit will not help you. If you were only able to make minimum payments on your balance, how long would it take you to pay off your new credit limit total? In doing so, how much interest will you be paying? The answers to these questions may demonstrate it is not the long-term debt solution you need.