According to one industry estimate, approximately 7% to 10% of Canadians use payday loans on a fairly regular basis to get by. Payday loan companies often trap low-income earners and cash-strapped individuals. At first, payday loans might seem like a useful quick fix to cash-flow problem, however, that immediate need for cash is the first indicator of debt problem.
Payday loans are short term loans designed to cover essential costs until your next payday. If you're struggling with debt problems, payday loans aren't the answer. If you can’t afford to pay the loan back on time, it could spiral into a much bigger problem. The major problem with payday loan is that there is usually very high upfront fee, astronomical interest rate and a relatively short repayment timeframe.
Once you've repaid the loan, you might not have enough money left to last until your next pay day. When this happens, it can seem like a good idea to take out another payday loan. Following this path however, can lead to a reliance on payday loans that puts you into an unmanageable financial situation. Therein lies the danger of being caught in a vicious cycle of uncontrollable borrowing. Furthermore, payday loans have extremely high interest rates and if you are not able to pay the loan back on the date it is due, the lender will likely add extra interest or charges to your account.
It is important to note that when you apply for a payday loan, the lender will normally request your banking information so they can take the full loan payment out of your bank account on the due date. When you give the payday loan company your bank details, you're authorizing them to take regular or continuous payments from your bank account. If there isn't enough money in your bank account to repay the loan, the payday lender can try to take the payment again – potentially leading to costly NSF fees from your banking institution. They can only try this twice, unless you've agreed to extend the loan.
If you don't have enough money to pay back the payday loan and cover all your essential living costs, you should cancel the banking authorization for automatic withdrawal payments. You can do this by asking your bank or the payday lender to stop taking the payments. They are required to follow your instructions. If they don't you can make a complaint and get any unauthorized payments refunded.
There are other less expensive alternate. A better way would be to apply for an overdraft protection from your bank to cover a shortfall, provided you have the capacity to repay the overdraft at pay cheque time. Taking out expensive types of credit like payday loans can be a warning sign that you're getting into problem debt and will need to address the issue sooner than later.
Payday lenders will not and do not participate in a voluntary Debt Management Plan (DMP), which means the only way you can get rid of your payday loan debts is by filing an Assignment in Bankruptcy or making a Consumer Proposal. If you find that you’re stuck in a cycle of debt due to payday loans or any other difficult financial situation, feel free to contact your local MNP Trustee for a free, no-obligation consultation. With smart financial planning and debt solutions customized to meet your individual needs, a fresh financial start is possible.
