Is There Such A Thing As A Good Payday Loan?

It’s a week before payday and your car just broke down. Your mechanic tells you it’s going to cost $750 to fix the problem, but you only have $500 to get you through the next seven days. You know your mobile phone, energy and cable bills are going to auto-withdrawal tomorrow. Those will cost at least $350. Not to mention, you were headed to the grocery store when the engine stalled. Your cupboards are bare, and your family will go hungry if you don’t buy food for dinner.

You check your online banking to see if there’s anything you can do to make it all work. But there isn’t. Your credit cards are maxed out and your savings account is empty. Putting off the repair is not an option, and neither is letting your family go hungry.

Desperate, anxious and embarrassed, you sink in your seat. A thousand thoughts are racing through your head as you alternate between beating yourself up and futilely thinking of ways to get out of this bind.

You lift your head from your sweat-soaked hands and glance across the street. The clouds may as well have parted and shone a light from the heavens. A bright neon sign in derelict strip mall across the street grabs your attention. It says, “Payday Loans! Everyone Approved, Guaranteed.”

“That’s it!” you think to yourself. “I’ll just borrow enough to tide us over and pay it back when my next paycheque comes in.”

If only you knew that sign was more siren song than divine intervention. You thought you were saved. But that’s when the worst of your financial problems really began.

Payday Loans Explained

The concept behind a payday loan is simple: you borrow money for a very short term – usually two weeks or less – and pay it back when you get paid. For their services, the lender will charge you high interest and fees based on a certain amount borrowed – often about $20 for every $100 loaned. Because credit checks are superficial or even non-existent, payday loans are especially attractive to low-income earners and individuals with poor credit who have trouble securing financing from more reputable lenders. There is usually a low barrier for approval, money borrowed is paid to you in minutes and, at first glance, they seem to be relatively affordable – which is precisely why they’re so dangerous.

In the case above, you borrowed the $750 needed to repair your car and paid it back one week later with the extra fees. As you near the end of the month, your budget is short again, by a bigger amount, so you return for another loan. Month after month, you are ever more “short” by the end of the month and you realize you’re completely beholden to these loans to make ends meet.

Unfortunately, scenarios like this are all too common and low-income debtors, not knowing where to turn when financial trouble hits, succumb to aggressive marketing tactics which promise worry-free approvals, manageable installments and quick cash in hand when they need it. These lenders are fully aware of the daisy-chain effect their products encourage – happily making billions of dollars every year on the backs of people they know are desperate and have few other options.

Beware the Short-Term Loan

In some markets, the explicit definition of payday lending as described above is not permitted at all. Organizations will often skirt regulations by packaging their products as short-term installment loans to be paid back over six months or less. The lender will often work with a loan broker who will pile on levy fees and convenience charges which significantly inflate the price over that term. So, while they may not carry the same stigma as a conventional payday lender, this kind of option is not only equally as expensive, it is also far more likely to trap unsuspecting creditors who think they’ve found a viable and more affordable alternative to the more notorious quick cash store. 

Not Even as a Last Resort

My obvious recommendation is to avoid payday loans and other short-term private brokered lenders completely. The high interest rates and hidden fees are a recipe for certain financial disaster. Though they seem like an effective way to escape a temporary position of financial hardship, they are specifically designed to cut off the borrower’s cashflow and make them wholly dependent on the lender to maintain a living. Numerous cases of consumer complaints and legal action has been taken against payday lenders in recent years, leading governments across the country to put tighter regulations and maximum interest rates on their services. However, the laws vary from province to province and the industry continues to be exorbitantly expensive. Millions of people still find themselves drowning in debt, entering consumer proposals or filing for bankruptcy every year because of their practices.

A better alternative to a payday loan is to meet with a bank or credit union about a consolidation loan. With a lower interest rate and monthly payments, you can pay down your credit cards, loans and other debts much more quickly while still maintaining a reasonable standard of living. Keeping a budget and saving money in an emergency fund are essential tools to avoid getting caught off guard by unexpected expenses which payday lenders rely on to remain profitable.

In the event a consolidation loan is denied or if you already find yourself drowning in debt due to a series of payday loans, it may be time to book a free confidential consultation with a Licensed Insolvency Trustee. We can explore your options and find a Life-Changing Debt Solution that is right for you. You can defeat debt. A financial fresh start is within reach and you don’t have to struggle alone.