Payday Loans | by Guest Author: Linda Stern, Licensed Insolvency Trustee
The Problem with Payday Loans
Payday loans do not require collateral and are considered unsecured loans. They fall in the same category as credit cards, bank loans and lines of credit. To attract customers, payday loan companies often use catchy phrases on their advertising, including no credit checks, fast and easy approvals, etc. These loans are very accessible to most consumers. But there is a catch. For all the convenience, such loans come with hefty price tags. Lenders assume a risk and for it, justify charging very high interest rates.
If you do not qualify for a credit card, bank overdraft or line of credit, then payday loan services can seem like attractive options during cash crunches. They meet a niche for short term loans. When the next pay cheque is weeks away, individuals can access these loans to pay essential invoices like rent or daycare fees.
Payday loans become problematic when you do not pay them off in full from your next pay cheque. Truly, individuals should only use them to resolve short-term cash flow problems. If you rely on them to resolve chronic and long-term cash flow problems, the astronomically high interest rates make them completely unsustainable.
Costs of Payday Loans
Generally, payday loans charge the highest interest rates in the industry. They range from $15 to $22 for every $100 borrowed. On the surface, it may seem reasonable to pay a $75 fee to cover a cash shortfall of $500. But the interest on this will quickly mushroom to 400% on an annualized basis, if you allow it to fester for a long time.
In recent years, almost all Canadian provinces have introduced strict legislation to regulate the payday loan industry. Governments have capped interest rates to a maximum and the services must clearly outline their terms and costs of borrowing up front. In addition, they cannot offer second loans to borrowers while the first is still outstanding. Supposedly, these rules are in place to protect consumers from abuse.
The Vicious Trap
Despite the legislation, sadly, consumers of payday loans are predisposed to ignoring just how expensive they can become. Many individuals enter into the agreements without thinking things through because they provide immediate relief to a cash flow problem and they are so easy to obtain.
People living paycheque-to-paycheque remain exposed to the highest risk. The interest rates create a big hole in their ability to pay off the loan in one go. Installment payments usually come with additional fees and all the while, the interest keeps compounding.
While individuals are prevented legally from taking out multiple loans with the same lender, they can enter into single agreements with multiple lenders. It is, therefore, commonplace for consumers of payday loans to carry three or four outstanding loans, using one to pay off a previous lender and others to cover upcoming cash shortages. This becomes a vicious financial trap and very difficult to climb out of.
Payday loan companies use similar legal remedies as collection agencies to recover their funds. Among other measures, they can enforce wage garnishments through your employer.
Solutions to Payday Loan Problems
It is therefore very important to manage your payday loan so it does not become a chronic financial headache. If it already has, then look at it like an actual headache. When pharmaceutical pills do not relieve your headache, you would seek medical attention from a physician to feel healthy again.
Financial headaches are treated in a similar fashion with credit counselling. Credit counsellors are qualified professionals who possess the knowledge and tools to help set you on the path to financial recovery so that you feel healthy again. Not only can they recommend the most optimum debt management solutions for you, they can also set up a budget for you to manage your finances for the long term.
Debt consolidation plans are ideal remedies for individuals with multiple creditors. Your counsellor can facilitate consolidation of your loans into a single convenient repayment plan. They would negotiate with your creditors to stop further interest from accumulating. And best of all, aggressive actions from your creditors, such as collection calls and wage garnishments would cease right away.
If your circumstances call for it, your counsellor can also direct you to a Licensed Insolvency Trustee to initiate processes that legally release you from these debts though a consumer proposal or bankruptcy.
Linda Stern, a Licensed Insolvency Trustee, is a guest blogger for Family and Credit Counselling Services, a blended not-for profit community-based agency offering debt counselling & management as well as family/individual support services within York region.
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