A payday loan is a short-term borrowing whereby lenders advance a small amount of money at a high interest rate. Payday loans are used to cover emergency and other expenses until the borrower’s next payday. This type of loan is also known as paycheck advance and cash advance, but the latter also denotes funds offered against a line of credit, for example, a credit card.
Payday loans are offered by different financial companies, pawn shops, check cashers, and loan stores. Some of the rent-to-own companies offer this type of loan as well. Payday loans are advertised online and via toll-free numbers. The mainstream financial institutions in Canada are not the major providers of cash advance payday loans (clients should not expect to find BMO payday loans, CIBC same day payday loans, or RBC payday loans).
Borrowers who resort to payday loans may find themselves trapped in repeat borrowing cycles. This is because of the short repayment periods and the high cost of borrowing. Some borrowers take over twelve payday loans a year from a single payday loan provider. While these loans are marketed as an easy and convenient short-term solution, many become indebted for months. Loan terms often require that the amount borrowed is paid in full within two weeks to one month, plus 400 to 600 percent annual interest. This is what catches people in a turnstile of debt. Borrowers soon find themselves denying dollars for necessities such as utilities, groceries, and child care.
Why do people take payday loans in the first place? Many feel financially stressed – whether having few if any savings, living from paycheck to paycheck, or struggling on retirement benefits, living expenses are beyond the financial capabilities of many of us. When emergency or unexpected expenses add to this, persons who need only a couple of hundred dollars are tempted to take a payday loan. However, rather than improve finances, payday loans may worsen one’s financial problems with their triple-digit rates of interest.
Still, payday loans are beneficial in some cases. The fact that it is easy and quick to obtain a payday loan makes it a preferred choice in emergency situations. Applying for a loan from a mainstream lender may take a couple of weeks while payday lenders advertise immediate approval. Salaried employees get quick access to same day payday loans, and all Canadian citizens are eligible for cash advance payday loans which meet their emergency needs. Even persons with adverse track record – those who have declared bankruptcy or filed a consumer proposal are likely applicants for payday loans.
It is easy to get approved for a payday loan and get instant cash because no credit check is required. Poor credit is not a reason to get rejected because the loan is secured by the applicant’s paycheck. The process of applying is hassle free and easy. Payday loans are paid off in full when due, but many financial companies let customers renew their loans by paying financial charges.
Lenders fees and the loan amount are automatically withdrawn from the borrower’s bank account on the due date. If the funds are insufficient to cover the payment, the borrower is responsible for paying the lender’s NSF fee, the fees for a non-sufficient funds check, and the withdrawal amount’s face amount.
Payday loan stores are often found in low-income neighborhoods, and there is an explanation for this. According to some critics, it is people with poor credit and low income who resort to payday loans. However, there is more to this when looking at the profile of the average borrower in Canada. Most borrowers fall in the age groups 25 – 34 (25 percent) and 35 – 44 (25 percent). The majority of borrowers have high school education (37 percent) and community college degree (34 percent). Only 7 percent of borrowers who resort to payday loans have elementary education. The majority of borrowers or close to 50 percent are married. Regarding income levels, it is interesting to note that 41 percent of borrowers earn between $25,000 and $50,000 and 17 percent earn between $50,000 and $75,000. Payday loan customers in Canada use other financial products as well, including debit cards, major credit cards, car loans, personal loans, and retail credit cards. They also use overdrafts and lines of credit.
Over half of the borrowers say they chose a payday loan and not a standard loan because it was quick and easy to get one. The main reasons for taking a payday loan are to meet unexpected expenses and to pay for necessities. Other reasons why borrowers need a payday loan include avoiding late charges on bills, buying something they wanted, starting over, moving, or renting. Temporary reduction of income is another reason why persons resort to payday loans. Then, the main reasons why Canadian borrowers choose a payday loan include: convenience, bad credit and no credit check, necessity and emergency, and no other alternative. Some borrowers say they are more disciplined because when debt is not revolving and is short-term it forces them to repay it on time.
How much do Canadians borrow? According to the Canadian Payday Loan Association, about 30 percent or 3 in 10 borrow between $200 and $299. On average, 17 percent or 2 in 10 borrow between $300 and $399, and only 22 percent borrow over $500. The average amount borrowed is $331.
Borrowers who apply for online payday loans complete an online application and provide their personal information, bank account and bank routing number. Other information includes frequency and source of income and employment information. All details are electronically transmitted to the payday lender. Some lenders break the application into several sections while others post the application on a single page. Multi-page applications are regarded as less intimidating, but the downside is that the applicant cannot view the whole information required until he/she has filled out earlier pages. It is unclear to applicants what happens to their personal and financial details if only some pages of the application have been completed.
Most payday lenders that offer online payday loans list the basic requirements to qualify for cash advance payday loans. Some payday lenders require that applicants make at least $1,000 a month, are of the age of majority, and have a checking account and a telephone number. Lenders verify the borrower’s employment information with the employer. Some payday lenders require that borrowers have been on the job for at least 3 months while others require that the borrower has been employed for at least 1 month. Payday lenders do not usually use any of the credit reporting agencies to assess creditworthiness. This means that poor credit is not a reason to disqualify persons who apply for online payday loans. Some online lenders use specialty credit reporting companies in order to screen applications. It should be noted that some payday lenders reject applications from borrowers who have defaulted on past loans.
Payday lenders that provide online payday loans make use of different marketing tools and strategies to bring in more applications. Some loan providers pay commissions for referrals while others offer discounts to new customers. There are payday lenders that offer $50 to persons for referring friends who take out a payday loan.
Bad credit payday loans are loans advanced to customers with credit problems. These loans have short repayment periods and are very expensive. Some studies show that the average recipient of bad credit payday loans is indebted for 212 days. Borrowers who use payday loans within a 2-year period take between 9 and 12 loans a year.
To this, there are several features making bad credit payday loans a debt trap. First, some financial companies advertise their payday loans online, and it is easy to flip or renew loans compared to loans based on paper checks. Second, some financial companies allow clients to extend their loans as long as they cover the finance charges. Payday lenders may roll over the loan four or more times without reducing the principal. They withdraw the finance charge every time. Third, some financial companies make it difficult for clients to pay off the loan. Borrowers have to send a 3-day notice before the loan’s payment is due. Oftentimes, the terms of repayment are hard to understand, and borrowers are unable to figure out how pay off the loan in full. Thus, they are forced to pay the finance charge. Finally, many payday lenders encourage their clients to renew their loans rather than pay off the loan in full. Some financial companies use this tactic to make sure borrowers remain locked in the existing payday loan instead of shopping around for better terms.
Notably, some payday companies offer same day payday loans to clients who have outstanding payday loans. They provide funds to persons who have payday loans with another payday loan provider. Having multiple loans secured with one paycheck makes it difficult for borrowers to repay all their dues when the paycheck arrives.
The Canadian Payday Loan Association is a body that represents payday loan providers offering check cashing services and payday loans to clients in Canada. The association takes pride in being a leader in consumer protection and best business practices.
In the view of the CPLA, payday loans are good choice for customers who have unexpected cash needs. Payday loans are economical and convenient when used for short-term needs. However, they are not designed to be used for continuing or long-term cash needs. Cash advance payday loans are beneficial when used for the purpose intended and in a responsible manner. The money loaned should bridge the gap between paychecks and solve temporary cash problems.
The Canadian Payday Loan Association represents a number of retail locations and companies across Canada. Borrowers in British Columbia, clients in Alberta, borrowers in Manitoba, and elsewhere can turn to the association. It represents loan providers in all territories and provinces, except Quebec.
The association has a Code of Best Business Practices which is the result of close cooperation and consultation with consumer advocacy groups. It ensures that all clients are treated equally and with respect and sets a high ethical standard.
The association warns that borrowers who take payday loans from a non-member of the association may be putting themselves at risk. All members of the association are required to follow the CPLA’s Code of Best Business Practices as a condition of membership. All member stores display the Code, and it is a door sticker that indicates their present membership status.
The Code entails clear rules regarding disclosure of maximum interest charges, fees, and charges. It endorses ‘no rollover’ policy, outlines fair collection practices, and aims to protect customer privacy. Members of the association agree not to grant clients an extension on payday loans. They should not advance new loans for the purpose of repaying existing loans unless applicable legislation permits this. Members should not advance multiple cash advance payday loans to clients in an amount that exceeds the initially approved for the client to borrow. Members of the association agree not to take title to assets or chattels of a client as a guarantee for repayment. In addition, members agree not to collect past due accounts in an unfair, unprofessional, and unlawful manner. Financial companies are prohibited from using all forms of harassment and intimidation as a way of collecting outstanding amounts. They are not allowed to threaten with criminal action when attempting to collect outstanding amounts.
Members of the association should comply with all regulations and laws applicable in the Canadian territories and provinces in which they operate. Members are also required to use plain language and disclose interest charges, costs, and fees in a clear manner. They should provide all customers with a copy of the agreement, indicating the high cost of the loan. Finally, CPLA members are asked to respond to customer complaints. Customers who are not satisfied may contact the action line of the Consumer Response and Resolution Bureau. The CRRB investigates and takes any necessary and appropriate action to resolve complaints.
The Canadian Payday Loan Association also offers advice on responsible borrowing. In the view of CPLA, payday loans are a good solution for customers who face cash problems due to an unexpected repair or bill. Taking a payday loan to pay a cable or telephone bill makes sense as it helps avoid a reconnection charge. At the same time, cash advance payday loans are designed for unusual and occasional use only. Borrowers who use such loans frequently are advised to look for other funding sources. Borrowers who take payday loans frequently may want to consult a non-profit credit counselor.
The association is committed to informing and educating borrowers regarding the available credit counseling programs. The CPLA provides borrowers with the necessary information so that they can take advantage of counseling assistance. Borrowers in Ontario can turn to the Ontario Association of Credit Counseling Services, and persons in Saskatchewan can turn to the Credit Counseling Society and the Provincial Mediation Board. Borrowers in Nova Scotia, New Brunswick, Newfoundland, and Quebec may turn to the Credit Counselling Services of Atlantic Canada.
Borrowers who are in need of cash may ask their employer for advance. Most employers give paycheck advances to employees. This is not a loan but a true advance, meaning that borrowers who ask their employers for advance will not pay interest. Obviously, paycheck advances are a good alternative to cash advance payday loans.
Many financial institutions feature checking accounts with overdraft protection. Financial companies that offer payday loans claim that bounced check fees are higher than their fee, but it is even better to prevent bounced check fees.
Some financial establishments offer small credit lines to clients with less-than-perfect credit. Lines of credit offered by such lenders go with a lower interest rate than payday loans and range from $2,000 to $5,000. Applying for a loan from a credit union is another alternative to payday loans. Credit unions in Canada offer short-term, small loans to union members. Given that affiliation requirements are not as strict anymore, many Canadian consumers can become members of credit unions. Finally, borrowers who need a payday loan to make payments toward other loans may want to consider negotiating a payment plan with their lenders. This is a way to deal directly with credit problems and debt.