The term “vicious cycle” could have been coined to describe payday loans.
A payday loan is designed to bridge a short-term cash shortage with an unsecured, high-interest, low-amount loan. If payday is still a week away, and you’re already strapped, you go into a payday loan establishment — often a storefront in a strip mall – with the required paperwork (such as a pay stub, T4, or other proof of earnings) and obtain a quick fix. These days, you can even do it on the phone or online without leaving the house. Amounts don’t usually exceed $1,500, and you’ll have the money in your hands or in your account in about 15 minutes.
The problem, of course, is that come pay day the loan company wants its money back. You just got paid and you’re already short. By the time a week goes by, you’re stuck again, and it’s back to the loan store. Interest rates, of course, exceed what you would pay from a traditional lender.
Although there have been numerous lawsuits (including a class action suit in B.C. whose awards are expected to be in the millions) for violations, there are laws in place to protect consumers. In Ontario, borrowers have a two-day grace period in which they can cancel the loan without incurring a penalty, and all costs of borrowing (including interest and fees) is capped at 21% of the amount borrowed. So-called rollover loans, in which borrowers will take additional loans from the same company before they pay off the original debt, are prohibited. Payday lenders must be licensed by the Ministry of Consumer Services and comply with all provisions in the Payday Loans Act of 2008.
It should be well clear by now that payday loans are a bad idea.
Strive now to get off the merry-go-round of payday loans. Cut your spending to an absolute minimum. Keep up with rent or mortgage, insurance payments, car loan payments, credit card debts, etc., but cut absolutely everything else including dinners out, take-out coffees on the way to work, gym memberships and whatever else you have to.
As an unsecured debt, a payday loan can be included in a consumer proposal or bankruptcy. If your finances have become unmanageable, talk to a credit counsellor today about how you can break the vicious cycle of payday loans.