How do I get help to avoid the pitfalls of payday loans?

Everyday at Paddon + Yorke Inc. we encounter individuals caught in a vicious cycle known as “the payday loan”.  Although you may think it’s a fast and convenient way to get cash when you really need it; you could potentially be setting yourself up for financial disaster.  Here’s what you need to know and understand about payday loans.

What is a payday loan?

A payday loan or sometimes called a payday advance is a very expensive short-term loan that you have to pay back on or before your next payday (usually two weeks or less).

Typically the amount you can borrow is limited to 50% of the net amount of your pay cheque.

How do payday loans work?

In order to qualify for a payday loan or payday advance, lenders will require you to provide proof of your employment income, a permanent address and an active bank account.  It’s also common practice that you provide a postdated cheque or authorize a direct withdrawal from your bank account for the original amount of the loan along with all additional fees, service charges and interest.  You will need to sign a loan agreement.  Some lenders will go so far as to try and have you sign an additional agreement (wage assignment) that says you agree to have your employer sign over future wages to the lender should you fail to repay the loan.

Just how expensive is a payday loan or payday advance?

Along with the outrageous interest rates, payday lenders charge countless other fees and service charges.  These fees or service charges may include the following:

  • An administration fee (sometimes includes interest charged on loan);
  • A processing fee;
  • A verification fee;
  • A convenience charge;
  • An early repayment fee;
  • A set-up charge;
  • A “locate” charge;
  • Collections fee;
  • A roll over fee;
  • A renewal fee;
  • A brokers fee;
  • NSF charge; and
  • Wage assignments or liens on personal property.

As you can see there are a considerable number or fees and/or service charges associated with the loan.  Typically service charges cost anywhere from $10.00 to $35.00 for every $100.00 borrowed or 10% to 35% of the loan.  For example if you borrowed $500.00 it may cost you anywhere from $50.00 to $175.00 in fees and service charges alone (and we haven’t even added any interest yet).

Let’s do some simple math:

Let’s use $500.00 as an example to calculate how much a payday loan is actually costing you.

First let us assume that the lender charges you a one time set-up fee of $10.00 and service charges of $50.00 (that includes interest).

Let us also assume the loan needs to be paid back in two weeks time (14 days).

Step 1:  Determine the amount of interest you will pay.  In this case, there is no interest fee.  Therefore the interest is $0.00.

Step 2:  Determine the cost of the loan by adding all fees, service charges and interest.

Cost = fees + service charges + interest

In this case, you would add $10.00 + $50.00 together.  The total cost is $60.00

Step 3:  Determine the total cost of the loan annually expressed as a percentage of the amount borrowed.

Annual cost of loan = (cost of loan/amount of loan) ÷  length of the loan     multiplied by 365 days

Annual cost of loan =

(60.00 ÷ 500.00) ÷ 14 x 365 = 3.12 or approximately 312%

The cost of the loan would be $60.00 with an annual cost of 312% of the original amount borrowed.  Alarming isn’t it?!

Before considering a payday loan, you should explore other cheaper alternatives or make adjustments to your budget before it spirals out of control.

For more information on payday loans you can visit:

The Ministry of Consumer Services at: http://www.sse.gov.on.ca/mcs/en/Pages/Consumer_Alert_Payday_Loans.aspx

The Canadian Payday Loan Association at: http://www.cpla-acps.ca/english/pr_2010_05.php

Money Mart at: https://loans.moneymart.ca/repayment-disclosures.aspx

If you have fallen victim of this type of vicious cycle, come in for a financial health check-up.  Book a free consultation with one of our professionals at Paddon + Yorke Inc.  We’re here to help.

Blog by Sonya Strand, contact her by clicking here.

We are located in Barrie, Bracebridge, Brampton, Georgetown, Huntsville, Kirkland Lake, Midland, Milton, Mississauga, New Liskeard, North Bay, Orangeville, Orillia, Parry Sound, and Sudbury for debt solutions.  Help us guide you through filing a Consumer Proposal or personal Bankruptcy.