When it comes to alternative borrowing, payday loans are about as risky as it gets. Payday loans are often used as a way to get access to credit quickly, regardless of your credit history or score. Here’s how it works:
- Payday loans are short-term loans offered by privately-owned companies, both online and in-store
- You can borrow up to $1,500 and the loan must be repaid from your next paycheque
- Each province and territory has different rules and restrictions governing payday loans
- In BC, the maximum fee for borrowing a two-week $100 loan is $15, with a maximum penalty of $20 for a bounced payment – these charges are in addition to the interest you will pay
- The maximum legal interest rate that can be charged in Canada is 60%, but with borrowing fees a two-week payday loan costs the equivalent of being charged an annual percentage rate of nearly 400%
- Once approved your lender may deposit your loan directly into your bank account, other times the loan amount will be available on a prepaid credit card, which you may have to pay to activate and use
Because payday loans come at a much higher cost than a traditional borrowing method, this can make them difficult to pay back – which in turn, often aggravates financial problems.
Although payday loans are intended to be used to help consumers access cash in the event of an unexpected financial need, many people wind up using them to cover day-to-day costs of living. For many Licensed Insolvency Trustees, a client who arrives owing payday loans is generally a sign that immediate debt restructuring is needed in order to solve an escalating debt problem.
Vancouver Licensed Insolvency Trustee Blair Mantin explains: “We don’t usually see people with just a single payday loan, more often than not someone has fallen into a cycle of payday loan use – they’re sometimes borrowing one just to repay the previous. With sky-high interest rates it’s no surprise that this type of financing gets out of hand very quickly. Anyone who has experienced the collection methods for an unpaid payday loan knows just how incredibly stressful this cycle can be.”
Brokerage Agreements for Cash Loans
In addition to payday loan use that has troubled the debt advisor community for years, Mantin and his team have recently begun to see an increase in a new type of ‘easy borrowing’ – cash loans that come via brokerage agreement. 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 the 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 ask for your payment to be postponed.
Here’s an example of the costs of taking a cash loan with a brokerage agreement – these are actual figures taken from a real loan and brokerage agreement in 2016.
For illustrative purposes, we’ll call the person “John” – he needed to borrow $700. John was offered the money he needed by a company we’ll call “ABC Loan”, by using a broker we’ll call “Borrow-Now”:
John gets the $700 he needs from ABC Loan at a maximum yearly interest rate of 32%, thanks to Borrow-Now. He will end up paying:
- $700 to ABC Loan for repayment of the actual amount he needed
- $27.86 to ABC Loan as interest on the money he borrowed
- $2.50 to ABC Loan for fees charged by them to withdraw John’s payments from his bank account
- $325 to Borrow-Now for their flat-rate brokerage fee
John must pay $730.36 to ABC Loan and $325 to Borrow-Now – that’s a total of $1,055.36!
It costs John $355.36 to borrow $700.
Not to mention:
If John had bounced any of his 5 payments to ABC Loan, they would have charged him each time, they would also have charged him each time he asked to postpone one of his payments, for any reason. John would additionally be charged fees by Borrow-Now for missing or postponing any of his brokerage fee payments.
Respondents polled in the 2017 BC Consumer Debt Study conducted by Sands & Associates said that accumulating more debt, and only making minimum debt payments were the top two warning signs that made them realize their debts were becoming a problem.
Are you considering using cash loans to meet your other debt obligations? Have you already found yourself stuck in a cycle of borrowing? There are solutions, payday loans and other debts can be effectively consolidated and cut using a Consumer Proposal, or even personal bankruptcy.
Book your free, confidential debt consultation with a qualified local Sands & Associates representative.
We understand that life can take many turns and we know that it’s difficult to take the first step and ask for support. We’re here to help you understand your options for dealing with debt so you can make the best choice for your specific situation and get a financial fresh start.