A recent study found a growing number of Ontarians on the edge of bankruptcy are turning to payday loans to make ends meet. The study was done by the insolvency trustee firm Hoyes Michalos & Associates. It found in 2017, 31 per cent of insolvent borrowers used payday loans. That is up from 27 per cent from the year before.
Household debt levels in Canada remain at record highs. The most recent Statistics Canada data shows the average Canadian owes $1.71 for every $1.00 of disposable income they make. This could indicate that more Canadians may be tapping the expensive payday loan market to pay their bills.
But if you don’t have a credit card or access to a line of credit, is a payday loan a good way to bridge a financial gap until you get back on your feet?
It is the most expensive way to borrow money
By using their own calculator, Money Mart, one of Canada’s leading payday lenders, shows borrowing a $1,000 on an 18-month payback plan will cost you $520 in interest. But the worse type of the short-term loans are the ones that are meant to get you to the next payday.
If you take a cash advance, or payday loan, in Alberta the Annual Percentage Rate (APR) on a $300 loan for 42 days is 201.84 per cent. The APR on a $300.00 loan for 14 days in BC is 443.21 per cent. For Manitoba residents, their APR on a $300.00 loan for 12 days is 517.08 per cent.
This isn’t secret information — these are number posted right on their website. Compare that to any credit card where the APR is around 19 per cent. In some cases, payday loans are 25 times more expensive than cash advances on a credit card, when calculated annually.
On the Ontario.ca website, there is a breakdown of how much a payday loan will cost you vs. a credit card cash advance in the short term. They say as an example, if you borrow $300 for 2 weeks, the payday loan will cost you $45, while a credit card advance with fees and an interest rate of 23 per cent, will cost you $6.15.
Exhaust all other options first
For anyone considering a payday loan, exhaust all your options first. Can you borrow from a friend for a short term? Do you have access to a line of credit? Is there something you can sell in your home to raise some cash? Can you pick up some extra work to make some more money? Even using your credit card will be cheaper than a payday loan.
Peer to peer lenders a good alternative
There are alternatives to payday lenders that are still more expensive than bank loans, but will cost you less money than borrowing from a payday lender. Peer to peer online lenders, like Mogo, Lending Loop and Lendingarch just to name a few. The money is invested from private sources. Rates are unique to each lender and the better your credit score, the better rate you’ll get. In some cases, the APR can be as high as 45.9 per cent, as stated on the Mogo.ca site.
Stricter regulations for payday lenders
Provincial governments across Canada are making changes to regulations to better protect consumers using payday loans. New rules are decreasing the amount payday lenders can charge consumers. In 2016, Alberta passed its Act to End Predatory Lending. The most that lenders can change is capped at $15 for every $100. They have also extended the buyback period.
There are similar changes happing in British Columbia. Since 2017, the maximum fee is now $17 for every $100 borrowed. In Ontario, the fee, as of January 1st, 2018, is $15 for every $100 borrowed. Many provinces are also considering regulating to have the buyback period extended as it is in B.C., giving borrowers more time to pay back their loans.
Payday lenders tout themselves as an easy way to bridge financing when you need to find the extra cash. But the reality is they are a complicated and expensive way to raise money, often making it hard to pay the loans on time and in full. This costs the consumer more money and keeps them in debt longer.