Massive lineups outside Payday Loans ! Canadians are Struggling to make ends meet

Quick Payday Loans Come With High Interest Rates
One of the main reasons not to get a payday loan has to do with their high interest rates, which are often higher than the interest rates on personal loans and credit cards.

Most payday lenders assess a fee for every $100 borrowed, which can range from $15 – $30. For example, if someone took out a $100 payday loan, they would have to pay back $115 by their next paycheque. A $15 fee to borrow $100 may appear like 15% interest, but when you do the math, it’s actually equivalent to a 390% annual interest rate, which is more than 10 times the typical rate on a high-interest credit card.

Although payday loans are meant to be a short-term fix if you need cash now, the reality of it is that with the quick turnaround time (borrowers have until payday to repay the loan) and the high loan interest, a lot of borrowers aren’t able to repay the full amount. Rather than defaulting on their loan, many borrowers opt to renew the loan, and in some cases the loan gets renewed so many times that borrowers can end up paying almost as much as the loan itself in just fees alone.

Payday Lenders Charge Costly Fees
These easy loans come with a quick turnaround time and quite often the borrower isn’t able to pay back the loan once payday rolls around. This leaves the borrower with two options: the borrower can default on the loan and run the risk of getting sent to collections, or the borrower can pay an additional fee to roll over the loan for another two weeks. And, as we’ll see, these fees are yet another reason to avoid payday loans.

When the loan is renewed, most payday companies assess a fee on top of the outstanding balance. So using our previous example, if you take out a $100 same day loan – which turns out to be a $115 loan with the initial fee – and you choose to renew the loan because you can’t pay off the payday loan by your next payday, you can expect to owe about $130, depending on the cost of the renewal fee.

What starts off as a quick fix and a relatively manageable level of debt can quickly escalate due to the accumulating fees. The more the loan amount increases, the more difficult it becomes to pay off the loan in full, which leaves the borrower with no choice but to continue renewing the loan and accumulating more debt.

Many people who aren’t able to pay back their loan for good often get caught in an unending cycle because they have to keep carrying over their loan, or they end up taking another payday loan from another loan lender in order to pay off an existing one, which is something we’ll explore more in depth below.

Relying on Fast Cash Can Lead to a Debt Cycle
Even though most payday loans in Canada are to be repaid within two weeks, reports have shown that the average payday borrower stays in debt for a much longer time period. Because of the high fees and interest rate, it’s easy to get caught in a repeat cycle of rolling over the loan for another two weeks, or taking out another payday loan in order to pay off old loans.

For example, let’s say an emergency came up and you needed $200 in cash. If your credit cards are maxed out and you don’t have enough money in your chequing or savings account, you turn to a payday advance lender to get the cash. For a fee, you get the money on the spot which brings you a temporary wave of relief. But come payday, you realize you don’t have enough money to meet your day-to-day expenses plus the cost of the loan.

So, you put down more money to extend the loan, which you hope to pay back by your next payday. However, by this time the amount you owe has increased, making it even more of a struggle to pay off the loan completely. So, you extend the loan once more to buy more time to pay off the loan. And, that’s how the debt cycle starts. As the cycle continues your balance keeps growing, and it could reach a point where you owe more in fees than you do on the outstanding loan.

Instant cash comes with a price, in the form of high fees and interest rates. This method of borrowing money can get expensive, especially if you’ve made a habit out of taking payday loans just to meet your day-to-day expenses. Getting a payday loan may help you get out of a financial jam, but it’s only a temporary solution to a more serious underlying problem.

Relying on Payday Loans Facilitates Unhealthy Financial Behaviour
It’s convenient and easy to get a payday loan, but the downside with getting easy cash is that it’s a temporary fix for a long-term financial problem. Until you can remedy the underlying problem, getting payday loans will only strengthen unhealthy saving and spending habits, which will cause financial troubles in the future.