What are good reasons to borrow money and how to avoid payday loans

Borrowing money isn’t always a bad thing. In some situations, your current income or cash flow might not be able to handle unexpected expenses. You may also need extra cash to invest in your future — or to achieve a personal goal.

However, not all loans are created equal. Some types of loans, such as payday loans, can trap you in a cycle of debt and borrowing due to the high interest rates they charge. Let’s explore some of the good reasons to borrow money without resorting to payday loans or other high-interest credit products.

What are good reasons to borrow money?

There is no right or wrong reason to borrow money — this decision is a personal choice that depends on your goals and your financial circumstances. However, borrowing money for any reason comes with a price tag and includes committing your future income, as well as the responsibility of fulfilling the terms of the loan.

It is important to explore all your options, compare these different options, and put a realistic plan in place to pay back the loan — plus interest — on time and in full. These general guidelines can help you focus on what really matters:

Invest in the future

A good reason to borrow money is to invest in your future or set aside funds for long-term personal growth. Some examples include paying for higher education, home renovations, or starting / investing in a business.

Future earnings

There are some situations where borrowing money can help you save money or earn income in the future. Consolidating high-interest debts into one loan or refinancing your mortgage are examples of these types of situations. Another example is purchasing a reliable vehicle, which will hopefully cost less over time because you will save money on maintenance.

Emergency situations

Sometimes, you may need to borrow money for something that is necessary and urgent — such as repairing your vehicle or even funeral costs.

How to avoid payday loans

Payday loans are short-term, high-interest loans that are typically due on your next payday. These loans are meant to be a quick, one-time solution instead of a long-term financial planning tool. While payday loans are marketed as a quick and easy way to get cash when you are in a financial bind, they can also be risky and expensive. Setting up an emergency fund or seeking financial assistance from family or friends are often better options to handle financial emergencies.

Additionally, it may be worthwhile to reach out to your bank for alternative sources of protection, such as personal loans, credit cards, or overdraft protection. You can also seek financial counseling resources from the Financial Consumer Agency of Canada.

Some of the most significant drawbacks of payday loans include:

High interest rates

Payday loans charge fees and the highest legal interest rates at a percentage rate (APR) of 35 percent.

Cycle of debt

These types of loans can trap you in a cycle of debt and borrowing, as you may have to roll over the loan or take out another loan to pay off the previous one.

Impact on credit rating

Payday loans can affect your credit rating if you miss a payment, are late making a payment, or simply by having multiple payday loans.

Predatory lending practices

Payday loan companies are largely unregulated, which can expose consumers to predatory lending practices, such as harassment or aggressive collection methods.

Take control of your finances

There is no right or wrong reason to borrow money — and in some situations it may help you invest in your future or achieve a personal goal. However, it is important to avoid short-term, high-interest payday loans to avoid paying high interest rates, prevent a cycle of debt, and protect your credit rating.

If you are struggling with payday loans or other overwhelming debts, contact your local Licensed Insolvency Trustee (LIT). We can help you review all the debt solutions and choose the best option for your unique situation — including Consumer Proposals and Bankruptcy. Together, we can help you achieve a debt-free future.