Payday Loans Explained

What is a Payday Loan?

A payday loan is a small, short-term loan that is used by millions of Canadians when they find themselves short of cash before payday. In Canada a payday loan is defined as any loan that has a value of $1500 or less and is for a term of 62 days or less. In practice, most loans are for amounts between $200 and $600 and the typical length of a loan is 12 to 15 days.

Why Do People Use Payday Loans?

Canadians use payday loans for many different reasons. The most common is as an emergency source of short-term credit when faced with a bill payment or other financial commitment that they cannot meet. By using a payday loan instead of missing a payment commitment, a borrower can avoid the fees, service charges and other negative consequences associated with a missed payment. When a payday loan is used to meet an unexpected financial need, such as a car repair, it allows the borrower to resolve that need immediately instead of waiting until payday.

When Should I Use a Payday Loan?

A payday loan is a cost-effective financial tool when it is used to meet a bill payment or other financial commitment where the cost of missing the payment (NSF fees and other penalties) exceeds the cost of the payday loan. There are also many scenarios where a payday loan is a smart choice for non-monetary reasons. For example, if a borrower needs money to get their car repaired, being able to repair the car today, instead of waiting until payday will allow the borrower to avoid the cost and inconvenience of having to find alternative modes of transportation to get to work, take their children to events and do everyday chores like buying groceries.

Tips for Using Payday Loans Effectively

Understand the Costs
When choosing to use any form of credit, be sure that you understand all of the fees and charges associated with it. These include any up-front fees that a lender may charge to open an account or arrange the loan, the interest or fees that are required to be paid when the loan is due and any overdue fees that you may incur if the loan is not paid on-time.

Understand the Terms
In addition to understanding the costs, it is also important to know when the loan is due, what your payment options are and what the consequences are if you cannot pay the loan on-time.

Review the Alternatives
When choosing whether or not to use a payday loan, evaluate all of your alternatives in order to identify the best option available. There are many different companies who provide payday loans in Canada so be sure to shop around. Some things to consider when choosing a payday lender are the rates they charge (including overdue fees and any other charges you may incur), how quickly your loan will be available, how much information is required on the credit application and what the repayment options are.

When considering a payday loan, you should also evaluate your other credit options. There are many different types of credit available to Canadians and each come with different costs and terms. Be sure to evaluate all of your credit options and choose the one that best fits your needs.

Borrow Only What You Need
In order to keep your costs down, try to borrow the minimum amount that will get you to payday. Payday loan rates are based on the amount you borrow and the less you borrow, the lower your costs will be.

Avoid the Cycle
A payday loan is intended to be a small, short-term credit vehicle that can bridge you until your next payday. Used this way, payday loans are a valuable financial tool that can help you effectively manage your cash-flow needs. While payday loans make financial sense in the short-term, they are not intended to be a long-term source of credit.

If you find that it is difficult to fulfill your financial obligations, or if you repeatedly fall short between paydays, consider borrowing a slightly smaller amount each time you use a payday loan or other source of credit. This will decrease your costs over time and is an effective way to reduce your debt.

Alternatively, you may wish to speak to a credit counsellor to learn more about the options that are available to you. Credit Counselling Canada is a National association of not-for-profit credit counseling agencies who help Canadians to use money and credit effectively. You can find out more about their services online at www.creditcounsellingcanada.ca or by calling 1-888-527-8999.