Payday Lending

A payday loan is a loan that you have to pay back out of your next paycheque. The companies that offer these loans require you to prove that you have a steady source of income, usually a job, although some lenders also accept proof that you are receiving government benefits or have another type of income.

Lenders usually let you borrow up to an amount that equals a certain percentage of your next paycheque, generally somewhere between 30 and 50 percent. In return, you have to give the lender either a cheque for the amount of the loan and all of the associated fees (postdated to your next payday) or permission to withdraw the total amount from your bank account on your next payday.

Payday loans usually cost much more than any other type of loan, so before deciding to get one, think about whether you have cheaper options. Alternatives include obtaining another kind of loan, such as a credit card advance or a line of credit from a bank or credit union, asking friends or family for help, or finding some way to delay your expenses until you get paid.

Payday loans should be your last resort. Because of the high cost, and because you must pay any loan off in full on your next payday, you may find yourself with even deeper money troubles when that time rolls around. After all, once the loan and the fees are paid off, the amount you have to live on for the next pay period will be significantly reduced. This can lead to a cycle in which you once again have to resort to a payday loan.

If you do decide to get a payday loan, read the loan agreement carefully and make sure you understand the true cost of the loan. Lenders often break down the cost into categories such as “interest” and “administration fees”, among others. Regardless of what all of the fees are called, the key is to understand the total amount that the loan will cost you.

Before signing the agreement make sure you understand it and remember to take a copy with you.

Several provinces have passed new legislation to regulate the interest rates of payday loans. Check with your provincial or territorial consumer affairs office to find out whether there are any rules payday lenders have to follow where you live.

For other information on payday loans, you can also visit the website of the Financial Consumer Agency of Canada (FCAC) and consult their publication Payday Loans: An expensive way to borrow.