Payday loans are short-term loan products that anyone can use for various types of emergencies. If your car has suddenly broken down, a kitchen pipe is leaking, or if your family member is sick and needs special medication, a payday loan is a quick answer for such unexpected expenses.
While it may sound like a saving grace, your loans can spiral out of control if you are not careful. So, before taking out a payday loan, you should read on to know how it works, what it entails, and what to watch out for to avoid scammers and unreliable lenders.
Basic Requirements Before Getting A Payday Loan In Canada
A payday loan amount can go up to $1,500, depending on the lender. Payday loans are called as such because the idea is, you have to pay it back instantly on your next salary. Generally, lenders in Canada will only require proof of the following:
- A steady source of income
- Bank account
- Proof of residency
As you can see, there are only a few requirements and they are rather easy to procure. This is why payday loans are popular among many people. Aside from that, they typically skip on credit checks, making the process easier and faster to obtain quick cask for those who really need it.
Even if a lender is particular about credit history, some payday loan providers still offer bad credit payday loans where individuals who have an unpleasant credit history are still welcome to borrow funds. However, lenders would need more requirements and impose certain instructions for bad credit payday loans. But overall, it is easier to obtain a payday loan rather than a bank loan, making them the perfect solution to emergencies and unforeseen expenses.
Approval time usually takes up a few days to a week. Some lenders can give cash on the spot too. However, you must pay the loan back within two weeks or on the specified date indicated in the agreement. Many problems and more fees will arise if you cannot do your part in the agreement.
Keep in mind that payday loans for Canadians come with regulations that vary per province. Whether you took out the loan personally or through an online lender, the terms of your agreement would be binding and should be followed. Lenders can charge you a fee if they cannot get your payment on the agreed date, and the penalty could be high if you did not bother reading the terms beforehand.
The Real Cost Of Payday Loans
This loan product does come with high fees, but it can be manageable if you are fully aware of how payday loans work. It’s a fact that payday loans are the most expensive of all consumer loans. Those considering taking out a payday loan must consider it as a last resort, and only in dire emergencies.
The interest rate could go as high as 60%, and any delays will only squeeze you for more. Payday loans can help solve your emergency cash problems, but only if you’re sure that you can pay it back within a month or less. Failing to pay back on time can result in severe consequences like:
- You could pay additional fees and interests called non-sufficient fund fees if you can’t pay the loan back in time. The amount will depend on the lender and where you live.
- If you’re keeping a pristine credit score, defaulting payment will damage that credit history. Your case will also be turned over to a collection agency that will contact you to get you to pay what you owe.
- The collections agency may take you to court, and the court can issue an order to relinquish and liquidate your personal assets that can be sold to answer for your loans.
- Court proceedings are public documents, so your delinquency will be on the record. Consequently, you will find it more difficult to secure financial assistance in the future.
The real cost of your payday loan is not just a matter of repaying the principal amount and interest. There would be charges and other fees, depending on the lender that you have dealt with and the agreement you agreed upon.
How To Protect Yourself From Payday Loan Scams
Not all lenders are the same, some are very predatory and would take advantage of desperate people. What you should do is find a reputable lender that will do business within the guidelines set by the laws and regulations of your province.
Before deciding to take out a loan, you can do your diligence and search out the best lender near you. You may find tons of websites offering payday loans, but be careful as some of them might be scams or phishing sites that will put your personal details at risk. So, to avoid suspicious lenders, especially online, here’s what you should look out for:
- There must be a physical address and a contact number that you can call to ensure that they are a legitimate operating business. You can also quickly check if the address exists and if the business name is registered in your province. Do not enter any personal information on their online form unless you are sure that what you are dealing with is a legitimate lender.
- If you prefer transacting face to face with a lender, you must inquire about the necessary fees, interest rates, the loan’s due date, and the maximum amount you can be charged if your payment is late.
- Ask the lender if there is a chance for you to end your loan agreement sooner. Lenders in various provinces are now honoring a cooling-off period where you can cancel the loan and avoid fees. Under the Business Practices and Consumer Protection Act, you can also do this by repaying the loan amount in full within two business days after receiving the money in your account.
- You can research the business name and look for trusted online reviews to see if the business is generally fine to be dealt with. New companies are harder to trust, especially as they have no proof of a good business standing yet. If you are searching for a company that has been operating for several years already, read and check if other people have good things to say about them.
- Legitimate lenders never ask for upfront fees before you can take out payday loans. Most of the time, they deduct it from your loan, and you can pay it back when you’re able. If a company asks for payments upfront, it’s a sign for you to stop communicating with them as this is most likely a scam. You can also report the name of the business to stop it from scamming others.
- Get the name of the business and run it under the Better Business Bureau to get some insights on how this company operates and get more testimonials from previous customers.
- Read the terms and conditions. Seek out the help of a public lawyer to help you go through the terms and see if it’s in your best interest. The agreement must also contain the customer’s rights, the table of the cost of borrowing, and the annual percentage rate (APR). A lawyer can help explain if the terms of your payday loan agreement are reasonable or not.
When a company is offering a deal that you think is too good to be true, then it probably is. While good deals should always be in your mind, not every contract can be real, especially if it seems better than what is offered by other companies. Most especially, if the supposed lender requires some kind of deposit before you can take out a loan, then be wary and avoid transacting with that lender at all costs.
Also, don’t forget that payday loan regulations may be different from province to province. You can read about your province’s regulations online if you want to be sure. By knowing your rights, you can deal with lenders more confidently. You can also ask the help of a public lawyer if you need more clarification on these regulations.
Lastly, always think twice before taking out a payday loan. Ask yourself if your purpose is for an actual emergency, or if you are just being financially impulsive. If you just need the money for travel expenses, eating out, or shopping for new dresses, then there’s no need to enter into a payday loan as these are not really emergencies. It’s best to avoid an additional financial responsibility if you will just have difficulties complying with the terms later on.
Laws Governing Payday Loans In Canada
Before laws and regulations were established to curb the practice of predatory lending, many Canadians were caught up in a bad cycle of debt because shady lenders or loan sharks were usurious and the agreements put borrowers at a disadvantage. Many unreliable lenders took advantage of people who were desperate for quick cash, and then imposed very high rates of interest that were impossible to keep up.
Borrowers, on the other hand, were trapped in the cycle of repaying debt after debt. They had to keep taking out loans just to repay the previous one. However, laws are now in place to protect consumers from this unfair practice and treatment. The Payday Loans Act of 2008 guarantees that:
- Lenders can only charge a maximum of $15 for every $100 that you owe.
- You can cancel a payday loan within two days, even without a reason. This is the cooling-off period that is provided by the law. Once cancelation is made within the 2-day cooling-off period, no additional fees shall be charged.
- The lender is not allowed to sell you goods or services in connection with the loan.
- Rollovers are not allowed. Lenders cannot renew your loan to pay for the first loan.
- The lender cannot extend the loan beyond the date of termination.
- The lender is prohibited from using your personal information for any purposes other than the loan.
- If the borrower’s paycheck has not arrived on the expected date, the lender cannot enter into another loan agreement with the borrower.
- If the borrower’s net income per loan is 50% lower than the advance, the lender is not allowed to enter a payday loan agreement with him.
Common Industry Practices
All lenders in Canada must follow laws before entering into payday loan agreements with a borrower. These rules are for the protection of both parties. The following are common industry practices that are established under Ontario’s General Regulations for lenders.
- A copy of the agreement must be issued to the customer once they’ve taken out the loan on the first day, or on the second day of the transaction.
- When a lender entered into three or more agreements with a borrower, the third agreement must include an installment payment plan that is equally spread over the whole period. Aside from that, lenders should not ask for more than 35% of the sum of the advance cash, plus fees if the borrower is receiving income frequently, and not more than 50% if the borrower receives income less frequently.
- If the borrower pays in advance, the lender must adjust the installment payments and update the agreement with a new computation.
Lastly, the Criminal Code of Canada limits the interest rates at 60% per annum. Anything higher than that is considered “criminal rates of interest”. Therefore, lenders who charge more than 60% in interest per annum is usurious and is therefore illegal.
Payday loans are of great help, especially during emergencies and you have no other recourse to secure funding. It is quick and easy to process. However, it’s an expensive loan because it has relatively higher interests than banks, but it can be managed if you’re sure that you can pay back what you owe at the soonest time possible.
There are also regulations in place that lenders must follow to operate their businesses without trouble. More importantly, these laws are made to protect consumers (borrowers) from unscrupulous lenders who charge hidden fees and high-interest rates.
As a consumer, you must be aware of the regulations regarding payday loans in your province so you will know your rights and avoid shady lenders. By staying vigilant and smart with your finances, you can avoid entering into unfair agreements and stay away from crippling debt.
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