The Truth About Payday Loans

A payday loan, also known as a payday advance or a cash advance, is a relatively small amount of money borrowed at a high rate of interest. Repayment is usually required within two weeks or on the next payday.

Payday lenders are prohibited in B.C. from collecting payment from the borrower’s employer and cannot loan more than 50 per cent of the borrower’s net pay or other net income to be received during the term of a payday loan.

The Good, The Bad and The Ugly

• Payday loans can be used to cover a cash shortfall until your next pay.
• Borrowers with poor credit who cannot obtain alternative financing are often eligible for payday loans.
• Payday loans are regulated provincially and there are strict rules in place around the interest rates and fees that can be charged, the number of loans allowed with one loan company and around collection practices.

The Bad

• Each province and territory has different rules and restrictions around payday lending. However, it’s important to be careful with online payday lenders, many are not licensed and don’t follow provincial rules designed to protect borrowers.
• In B.C. payday lenders can charge up to 23% interest on payday loans.
• In B.C. payday lenders are regulated by the Business Practices and Consumer Protection Act, Payday Loans Regulation.
• Example of cost of borrowing a payday loan in B.C.:
• If you borrow $300 when you have to repay the loan 14 days later, the amount you pay is $363. That is an annual interest rate of 546 per cent.

The Ugly

• If you can’t afford to pay the $363 two weeks later, you could be charged an additional $20 for a dishonored cheque or pre-authorized payment and you could be charged a penalty. Your $300 loan is now costing you $83 in fees and interest, before you can even use any of your pay cheque.
• If you don’t pay your loan, the lender can sell your loan to a collection agency which can seriously hurt your credit rating.
• Collection agencies may sue you, garnishee your wages or seize your property.

The Payday Loan Cycle

Often when the pay day loan comes due, the borrow ends up paying a fee and rolling over the loan into another two week period, paying another fee and interest charge in hopes they will be in a better position to repay the loan next payday.

One common complaint I hear from my individuals who I help with their debts is ‘I wish I had never started using payday loans, once I started I could never seem to stop the vicious cycle of re-borrowing’.

I think of payday loans like running on a treadmill where the speed keeps getting faster. You can’t keep up but aren’t sure how to safely step off. The payday loan cycle is difficult to stop and many borrowers use multiple payday loan companies and have multiple loans outstanding at any one time. The added stress of not knowing how to pay the loan off can cause borrowers to give up and stop trying to pay. This can lead to some of the ‘ugly’ collection issues listed above.

So how can you stop the payday loan cycle?

Stop the cycle

Payday loans are short term fixes for emergency situations. If a short-term payday loan has caused you long-term problems we recommend you contact an MNP Trustee and find out about the life-changing debt solutions we offer so you can erase debt from your life for good and get back on track for a strong financial future.

Contact an MNP Trustee for a free confidential consultation.

Payday Loans Legislation in British Columbia

To file a complaint against a payday lender or learn more about how payday loan companies are regulated click here.