Payday Loans Don't Pay Off
Now that the holidays are over, you may be feeling the financial pinch from all of the expenses that this season brings. January can be one of the most difficult months to get through financially, with many people struggling with maxed-out credit cards and emptied savings accounts. Have you been feeling tempted by payday loan lenders with their offers to help you get through this difficult time?
While payday loans can seem like an attractive option, it’s not a particularly smart one. We want you to be aware that when you use payday loans, the repayments of these loans make them a poor financial choice.
The Reality of Payday Loans
While holiday shopping may have got the best of you last month, don’t let yourself fall further into debt. Payday loans are responsible for 37% of Ontario insolvencies, which makes them a dangerous option when trying to improve your financial situation. On average, insolvent payday loan borrowers owe more than $5,000 on nearly four different loans, which shows just how common it is to spiral further into debt when taking out these types of loans.
Although the Ontario government has taken steps to protect consumers from the risks associated with payday loans, the number of people taking out these loans is on the rise. This is due in part to the ease in accessing the loans, as many payday lenders operate online compared to the brick and mortar lending stores of years past.
Interest Rates of Payday Loans
Despite the flashy advertising by payday lenders, the interest rates they offer are not as good as they seem. Many payday lenders will advertise that they offer rates starting at 20%, but many borrowers find themselves paying much more. This is why the Ontario government recently changed legislation to help protect borrowers from being charged hefty interest rates.
As of January 1, 2018, payday lenders are not allowed to charge more than $15 for every $100 that is borrowed. Still, this 15% interest rate isn’t as good as it looks at first glance. If you agree to repay the loan within 14 days, the equivalent annual interest rate would be a staggering 391%.
In comparison, a credit card with a higher interest rate would still be a more affordable option than taking out a payday loan. For example, if you borrowed $500 on a credit card with an annual interest of 20%, this would cost you less than $10 per month.
Payday Loan Fees
If you aren’t able to repay your payday loan in full by the due date, the lender will most often charge you late fees. The lender may also charge interest on the additional days it takes you to repay the loan. This is why many people end up in a worse financial situation than when they started. For example, some borrowers decide to repay the first loan by taking out a second payday loan, which increases the risk of becoming insolvent.
There is also a risk that the payday lender will sell your loan to a collection agency. This can negatively affect your credit score and impact your ability to obtain future loans. If you find yourself in this unfortunate situation, a meeting with a licensed insolvency trustee can help you consider which debt options can best improve your finances.
Know Your Rights
If you decide to take out a payday loan, make sure you know your rights as outlined in Ontario’s Payday Loans Act. If you are having second thoughts after taking out a payday loan, you have two business days to cancel the contract. Payday lenders are not allowed to charge you with a penalty for cancelling the loan agreement.
Payday lenders are prohibited from requesting that loan payments be made by taking automatic deductions from your paycheque. Lenders are also not allowed to contact your family, friends or acquaintances in attempts to recover the amount owed or process payments that will result in insufficient charges from your financial institution. If you feel the lender has not followed the Payday Loan Act, you can file a consumer complaint with the Ontario government.
Don’t let yourself be a victim of a payday loan that will make your financial situation even worse. Contact us for a free consultation with our licensed insolvency trustees to learn about safe debt solutions that can work for you.