Although payday loans are intended to help consumers with an unexpected financial need, many people wind up using them to cover day-to-day costs of living. Because payday and ‘fast cash’ loans come at a much higher cost than other types of borrowing options, they are often difficult to pay back, quickly creating a stressful borrowing cycle that can be very difficult for individuals to break on their own.
It’s not uncommon for consumers to carry multiple payday loans at a time, and, for many Licensed Insolvency Trustees, payday loan use is often a sign that a person may need urgent help to solve an escalating debt problem. Read on to learn more about what makes payday loans so risky, and what you can do to break a payday loan cycle and get relief from payday loan debt.
How do Payday Loans Work?
A payday loan is a short-term, high-cost loan where you can borrow up to $1,500 from a privately owned company, either in-store or online, which must be repaid within 62 days. The regulations and fees for payday loans vary depending on the province or territory you live in.
In BC, payday loans are governed under the Business Practices and Consumer Protection Act, and payday lenders are regulated by Consumer Protection BC. The regulations specific to BC include:
- A payday loan must not be for more than 50% of your paycheque, and a payday lender is not allowed to provide you more than one loan at a time.
- As of January 1, 2025, the maximum amount that a payday lender can charge you can’t be more than $14 for every $100 borrowed.
- In addition to this, if you don’t repay your payday loan as agreed, a payday lender may charge default fees of up to 30% interest per annum on the outstanding principal and a one-time fee of $20 for a dishonored cheque or pre-authorized debit.
- If you have a payday loan you entered into before January 1, 2025, the maximum fee charged for every $100 borrowed can be up to $15.
Effective January 1, 2025, the maximum legal interest rate that can be charged in Canada is 35%, but, when you add up all of the interest, borrowing costs, and associated fees, a two-week payday loan can cost the equivalent of being charged an annual interest rate of 365%.
Installment Loans Offered by Payday Lenders
Consumers who may not qualify for traditional bank loans may also consider taking out an installment loan offered by a payday lender. High-cost installment loans available through payday lenders are often easy to be approved for but have interest rates that are much higher than traditional lenders. A high-cost installment loan issued by a payday lender may:
- Be available for larger amounts than a payday loan
- Have a repayment term of six to 84 months
- Have an interest rate from 32% up to 34.99%
- Be offered with optional extra products like insurance that can balloon your payments
It’s important to consider the total costs of borrowing including all interest and other fees. Depending on the terms of your installment loan, you may end up repaying significantly more than the amount borrowed; often multiples of the original amount!
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Brokerage Agreements for Cash Loans
In addition to payday loans borrowed directly through a payday lender, consumers may also be offered cash loans that come via ‘brokerage agreements’ (i.e. a company that claims to work with many lenders to help you find a loan). Essentially the broker acts as a go-between, matching up the individual seeking credit with a lender willing to provide it – for a big brokerage fee.
- Some brokerage companies look deceivingly like an actual lender, so many people may not realize there are two companies to pay until they’re partway through the application process.
- In addition to paying the brokerage fees, same as the payday loan lender, the broker may also charge flat rates if you miss a payment to them or even charge fees if you ask for your payment to be postponed to a later day in the same month.
What to Consider Before Taking Out a Payday Loan
Taking out a single payday loan (or an expensive installment loan) often kicks off a cycle of borrowing that can be incredibly difficult to break. The high cost of using a payday loan is exactly what makes payday loans (and payday lender installment loans) so risky. After repaying your payday loan, you’ll have less left from your paycheque to live on, which often prompts people to take out another payday loan.
- It is often the experience of Licensed Insolvency Trustees that a person seldom has only one payday loan due at a time, though a payday lender must not issue you more than one loan at the same time, nor roll-over your loan. An increasing number of clients often have debts to as many as five to ten individual payday lenders, creating a stressful ‘balancing act’ of trying to keep all debts out of default.
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BOOK YOUR FREE CONSULTATIONIf you are thinking of taking out a payday loan and have no other viable alternatives, it’s very important to be certain you understand the terms and conditions of borrowing and know that you have rights. Your rights in BC when it comes to payday loans include:
- You can cancel and repay your loan within two full business days, without paying penalties for cancelling.
- You can repay your loan in full early, without penalty.
- You can repay your payday loan over three bi-weekly payments if it’s your third payday loan from the lender in the last two months.
- You should not be charged for cash cards, nor sold insurance (or required to get your loan insured) by a payday lender.
- You should not be asked to pay an upfront fee prior to obtaining a loan – this is illegal.
No matter where they are located, payday lenders and high-cost credit lenders doing business with BC residents must be licensed with Consumer Protection BC, even if they are an online lender.
Never borrow money without first verifying that the lender is licensed with Consumer Protection BC:
- Beware of companies that advertise instant approvals or that guarantee you will get a loan even if you have bad credit.
- Watch out for companies and websites that are “lead generators” – they will advertise payday loans but will only collect your information so it can be sold to lenders or other lead generators.
Alternatives to Payday Loans
Having an emergency savings fund to cover unexpected costs can be one of your best defenses to avoid situations where you are considering high-cost borrowing, but many British Columbians are struggling with costs of living that make saving difficult.
Although some banks and credit unions are catching on to offering small short-term loan options at better interest rates than payday lenders, even this isn’t an ideal solution if you need to cover an unexpected expense or gap between paydays. When it comes to using payday loans, our advice is to “just say no” and look for alternatives to borrowing and payday lenders wherever possible – for example:
- If the loan is for rent, you may consider discussing the situation with your landlord and trying to negotiate to pay the rent a little bit later – if it’s an isolated incident and your communication is clear, a landlord or other creditor may be willing to be flexible.
- Asking your employer for a pay advance or whether you can cash in some vacation days.
If you’ve used a payday or installment loan more than once in the last six months this could be an indicator that you’re at risk of a larger ongoing financial problem – and if your debt payments have become difficult, talk to with a local Licensed Insolvency Trustee right away.
A Licensed Insolvency Trustee Can Help You Break the Payday Loan Cycle
Licensed Insolvency Trustees are Canada’s only official debt help experts, and many say that two things are key when it comes to breaking a payday loan cycle – one is clearing your payday loans, and the second is to stop using payday loans.
Many people struggling to stop a payday loan cycle are also carrying other debts that they are having difficulty paying off and a Licensed Insolvency Trustee can help you understand all your options and work with you on a debt repayment plan that’s affordable for you and your situation.
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Book your free consultation with one of our experts and start living a debt-free life.
BOOK YOUR FREE CONSULTATIONSolutions that can offer you relief from payday loan debt include, but are not limited to:
Making a Consumer Proposal to Consolidate Payday Loans
Many people caught in a payday loan cycle don’t have the income or credit rating strong enough to qualify for a traditional debt consolidation loan, and a Consumer Proposal offers you the option to consolidate and cut your debt down to what you can reasonably afford to repay, without borrowing, interest charges, or added fees.
- A Consumer Proposal can be a cost-effective way to consolidate payday loans and other consumer debts such as credit cards, overdrafts, government debts and more.
- Consumer Proposals can cut your debt by up to 80% or more, and you can take up to five years to pay off the new interest-free balance.
- Your credit rating is not a qualifying factor for a Consumer Proposal, and you don’t need to be behind in your bill payments either.
Only a Licensed Insolvency Trustee can help you make a Consumer Proposal, and you can talk with a Licensed Insolvency Trustee for free – no referral needed.
Filing for Personal Bankruptcy to Have Payday Loans Forgiven
If you can’t afford to make any payments on your debt, a personal bankruptcy is an alternative debt solution to consider in order to clear your payday loans and other debts.
- In BC, most people exit personal bankruptcy in as little as nine months, paying only an administrative fee for their bankruptcy.
Explore Solutions for Payday Loan Debt Relief in a Free Consultation
Sands & Associates’ non-judgmental Licensed Insolvency Trustees work with consumers across BC and our qualified, caring professionals are available seven days a week.
Whether you are looking for consolidation options for payday loans or debt relief from credit cards or other debts, we will take the time to help you understand your situation and explore all your options together so you can make an informed decision about how to move forward with a debt-free plan that’s right for you.
Take 30 minutes and connect with a local licensed debt help expert today. Our full suite of services is available at local offices throughout the province, with telephone and online options.
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