A very short-term loan, for an amount usually not exceeding $1,500, is known as a payday loan. The loan’s name emanates from it being a sort of a bridge finance to enable the borrower to survive till the next payday.
These are usually offered by private players, operating out of storefronts, but now increasingly going online.
Why people take payday loans?
They are available in a jiffy. The application process, assuming you have your documentation ready, can be completed in a few minutes and you walk out with a cheque in hand or a transfer to your account. The verification usually done is that you have a bank account and that you have an income that will get credited to your account on a certain day.
The lender will deposit the money into that bank account, in which the pay is expected, and take a backing cheque from the borrower which they will encash on the payday to recover their dues. This is the other reason they are called payday loans.
These loans are usually taken by people who are unable to access any other form of credit from the more established lenders. With many people living from payday to payday, the popularity of these loans, with all their drawbacks, refuses to diminish.
What is wrong with pay day loans
They are exorbitantly priced
Charging $30 for a $200 loan that needs to be paid back in two weeks is not uncommon. This works out to an annualized interest rate of 300%. At this rate, if a borrower who relies on payday loans to make ends meet, were to keep $200 borrowed at all times in the form of payday loans, he will pay an amount of $600 as interest over the full year. For a borrowing of $200. There could be other charges too. Annualized interest rates of 600% are not uncommon.
Borrowers get sucked into a never-ending cycle of debt
These loans are taken by the most financially stretched people, who have nowhere else to turn to for money. These people are the least well positioned to generate the income that will enable them to pay this off comfortably. With 50% of Canadians estimated to be living from one payday to the next, this sets off an ugly cycle of living from one payday loan to the next, with a significant part of earnings going towards servicing the debt which is contributing to the financial problem, not solving it. This results in them having even lesser amounts left from their earnings to meet their normal expenses, resulting in an increase in the amount they need to borrow.
Payday lenders are known to be the most ruthless collectors of loan dues. They leave no stone unturned to call you, find you, let your family and friends know, bank the cheque again and again if it bounces, creating bank charges for you, and all other tricks in the book to ensure they do not face an unpaid loan exposure. A court judgment being slapped quickly is par for the course.
What are the alternatives?
- Ask the employer if an advance against the paycheque – Many organizations either have these policies or are flexible enough to accommodate such requests, especially from stable employees.
- Ask family and friends for money – this is embarrassing but not more embarrassing than drowning under debt as a result of taking payday loans.
- Credit Card options – Credit Card debit is considered to be expensive but it pales in comparison to payday loans. Max out your credit cards before turning to payday loans.
- Leverage community resources – Soup kitchens and food banks are supported by communities for this very purpose, of helping people through financial difficulties. Don’t let pride keep you off these support systems.
Considering the profile of payday loan takers and the reasons they take them, the above could also be unviable suggestions for many of them. Maybe they have used up these options and only after that they have exposed themselves to payday loans.
Whatever the reason, the only real solution is for them to take a long hard look at their lifestyle and income and expenditure and put that in order by either educing expenses or taking up additional forms of paid work, or both. It is a long-term, fundamental issue that cannot be solved through the payday loan mechanism.
If required, seek help and counselling.