All and all, Pay-day loans are a very expensive way to borrow money and in our experience when issuing credit counseling advise either in a bankruptcy or proposal situation, most debtors indicate that using a Pay-Day loan services can be a very expensive habit. Sometimes they can help, but at times they can seem a quick path to insolvency and bankruptcy. Getting what you believe to be a short term loan, in end tends to make the financial problem worse in the long run.
What is a Pay-Day loan in British Columbia?
Pay-day loans are small, short-term, and high interest loans. A payday loan is a short-term loan for a relatively small sum of money, provided by a non-traditional lender. Statistics from the Canadian payday loan industry suggest that the average payday loan is valued at $280 and is extended for a period of 10 days. Payday loans are short-term loans of under $1,500 that must be repaid within 62 days. The loans are sought out for a variety of reasons, including covering unforeseen emergencies and paying bills between pay cheques
They are a very expensive way to borrow money. You may wish to speak with a credit counselor about other, lower cost ways to borrow money, such as a loan from a line of credit or a cash advance on your credit card.
If you get a payday loan, some payday lenders will require you to provide a postdated cheque to cover the costs of your borrowings or require an authorization which will allow them to process a direct withdrawal on the due date of the loan. The additional costs will include the different fees and interest charges that will be added to the original amount of the loan.
Other lenders will require you to repay the loan in cash on or before the due date, and may charge an additional fee if the loan is not repaid in cash by you and thus they take the “penalty step” of cashing your posted dated cheque or process the direct withdrawal subsequent to the loan due date. If there are insufficient funds in your account, you may also be required to pay a return fee to the payday lender and/or a non-sufficient funds (NSF) fee to his/her bank or credit union. In this instance, the borrower may have the option of “rolling over” the loan – that is, taking out another payday loan to pay off the original loan – for an additional fee.
So before you get your first Pay-Day loan, consider the following;
- Do you really need to take out a loan, or, will a little tweaking of your budget allow you to get by until your next pay cheque.
- Do you have other sources of quick cash that can be used? . For example, you may be able to cash in vacation days at work or take any banked time as pay rather than future time off.
- Consider getting a line of credit or overdraft at your bank account. These are relatively inexpensive ways of having access to extra funds, for short-term use.
- Sell some of your assets. Used Victoria or other similar sites are a great free service that can be used to sell some assets that may be kicking around your house that can be sold if need be for a quick source of cash. Consider selling the instrument you had in high school, unused furniture or sports equipment that you no longer need.
- Look at your variable expense. These types of expenses are those that you can change quickly that may provide you extra cash if you are in a pinch. For instance, consider parking your car for a month or two and walking or taking a bus.
Understand the fees that can be legally charged by the Pay-Day Company. In 2011 Consumer Protection BC found that one of the major Pay-Day lenders were charging excessive fees for their loans to hundred of customers.
Consumer Protection BC has found that the operator of The Cash Store and Insta-loans violated provincial law starting in 2009 by overcharging customers for payday loans by requiring customers to also pay for cash cards.
By law, the maximum lending rate in B.C. is $23 on $100, but customer were sometimes charged anywhere from $7 to $21 above that per loan, Consumer Protection BC has found.
Be your own watch dog. Ask questions. Consider getting the following:
- Ask about all the fees, charges and interest that apply when you first get the loan, and what other charges you will owe if you can’t pay the loan back on time.
- Ask for a copy of the loan agreement. Read this document carefully before signing it, and keep a copy for your records.
Whether they are called fees, commission, interest or something else, it all adds up to the total amount that the loan will cost you.
Payday lenders must have a poster in their store giving an example of the total cost of borrowing, like the table below:
PAYDAY LOANS ARE HIGH COST LOANS
Example:
$300 loan for 14 days
Principal amount:
$300
Total Cost of borrowing:
$75
Total to repay:
$300 plus $75 = $375
Annual Percentage Rate:
APR = 651.79%
From a Federal Report on Payday loans
Causes for Concern
The ongoing and expanding presence of payday loan companies suggests that some Canadians are willing to pay usurious rates of interest – in excess of that permitted under the Criminal Code – for their payday loans. This situation raises important questions about whether and how issues in the payday loan industry should be addressed, by whom, and with what consequences for the industry and its customers.
If one calculates the rate of interest charged on payday loan transactions using the definitions and methods specified in the Criminal Code, some payday loan companies appear to be charging criminal rates of interest. Table 1 illustrates this point by showing the details of a payday loan transaction that occurred in Canada in fall 2004.
Table 1
Sample Payday Loan Transaction
Value of the payday loan advanced on 27 September 2004
$400.00
Amount paid by the borrower on 14 October 2004
$451.28
Term of the loan
17 days
Breakdown of amount paid by borrower:
Principal
$400.00
Interest
$8.64
Per item fee
$9.99
Cheque-cashing fees (7.99% of principal and interest)
$32.65
Effective annual rate of interest
1,242%
Note: Calculations were performed by Karp Actuarial Services Ltd. based on the terms of a payday loan contract between National Money Mart Company and a customer.
Source: Association of Community Organizations for Reform Now Canada, Protecting Canadians’ Interest: Reining in the Payday Lending Industry, November 2004, Appendix 2, Transaction B, pp. 32-34.
While the interest amounts to a relatively small fraction of the total cost of the loan, the comprehensive definition of “interest” in the Criminal Code also includes the per item fee and the cheque-cashing fees, which together account for the bulk of the cost. Some payday lenders do not explicitly charge interest and instead use a flat-rate fee, which is considered as interest under the Criminal Code. The high effective annual rates of interest are also a direct function of the small-sum, short-term nature of payday loans. Table 2 shows how the effective annual rate of interest decreases as the value of the loan and/or the loan term increases, assuming a fixed fee of $10 per loan.
Table 2
Effective Annual Rates of Interest, Assuming a $10 Charge on Each Loan Regardless of the Loan Size or Term
Loan Term
Value of the Loan
2 weeks, 1 month, 1 year
$100 1,100%, 219%, 10%
$500 68%, 27%, 2%
$1,000 30%, 13%, 1%
$10,000 3%, 1%, 0.10%
Note: Boxes shaded in grey indicate loan arrangements that would result in a criminal rate of interest, as defined in the Criminal Code, being charged to the borrower.
Conclusion
The payday loan industry presents an interesting situation for policy makers, where both the public interest and the best course of action are somewhat unclear. Some members of the payday loan industry appear to be charging usurious rates of interest, in violation of section 347 of the Criminal Code. Criminal prosecution, however, could eliminate the payday loan industry and – in the absence of increased servicing by traditional lenders – leave some consumers without access to the credit or convenience they desire. Proposals for a Canadian regulatory regime for the industry may provide a compromise solution on which all stakeholders can agree.
