Guide to Payday Loans in Canada

Every year some 2 million Canadians take out payday loans, usually in an emergency or to cover a shortfall in income. In this guide, we will break down payday loans and look a little bit at the legal history, the rates available and what alternatives are available.

The important thing to remember is that payday loans are a last resort. Even though the government has moved to offer better consumer protection and suspended the licences of some unscrupulous providers it will be well worth your time to familiarize yourself will all your options and know what can happen if things go wrong.

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What are payday loans?

A payday loan is a sum of money lent to an individual by a licensed payday loan company. Think of them as a personal loan with a quick prepayment. Companies started offering payday loans in the 1990s to provide small sums of immediately available cash to consumers with the idea that people would borrow what they could afford to pay back with their next month's paycheck.

It is illegal in Canada for a lender to demand more than 60% interest and you should report anyone trying to operate outside the law. Since 2004 the Canadian Consumer Finance Association has represented the industry as well as lobbied the government on its behalf. There are nearly 1,500 independent operators across the country and, since 2007 they are subject to provincial rather than national legislation.

Before considering a payday loan, see if you are eligible for a personal loan.

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How do payday loans work?

You can borrow up to $1,500 in a payday loan which you must repay within a set period. This loan is intended to solve a temporary problem which will be solved by your economic situation returning to its normal conditions. In essence, the loan is for people who have regular income but no savings. If you have several large bills that all become due at the same moment and are unable to use savings to pay them then a payday loan allows you to spread the cost over two months or two paychecks. It is not intended to solve a permanent change in circumstances, such as loss or reduction of income and the mandatory repayment times are set to enforce this.

The repayment times vary between provinces and are as follows:

If you are unable to repay the loan within the set period you will owe penalty fees and fines making an expensive way of borrowing even more expensive.

How to take out a payday loan?

You can take out a payday loan online or in a local payday loan store. To take out a payday loan you will need to have the following documents ready:

• Proof of residence
• Bank account information
• Proof of wages (such as pay stubs)
• Proof of identity (like a passport or license)

You will need to sign a document allowing the lender to directly take the full amount of the loan plus interest from your bank account. This is called a "pre-authorized debit". The money will then be released to you. Some lenders may give you the loan in the form of a prepaid card or via e-Transfer.

How much you can borrow with a payday loan in Canada?

In Canada, you can borrow up to $1,500 at a time from a payday loan provider. Different provinces have different rules as to whether you can take out multiple loans and different interest limits.

Province	Interest limit	Additional restrictions
Alberta	15%	Lender cannot access your bank account loans cannot be extended
British Columbia	15%	cannot take out more than one loan loan limited to 50% of wage Lender cannot access your bank account loans cannot be extended
Manitoba	17%	loan limited to 30% of wage loans cannot be extended Lender cannot access your bank account
New Brunswick	15%	loan limited to 30% of wage Lender cannot access your bank account
Newfoundland & Labrador	21%	cannot take out more than one loan loan limited to 50% of wage Lender cannot access your bank account loans cannot be extended
Northwest Territories, Nunavut & the Yukon	60%
Nova Scotia	19%	Lender cannot access your bank account
Ontario	15%	loan limited to 50% of wage Lender cannot access your bank account loans cannot be extended Lender must offer a repayment plan if 3 loans taken out within 63 days
Prince Edward Island	15%
Quebec	35% AIR*	loans cannot be extended
Saskatchewan	17%	cannot take out more than one loan Lender cannot access your bank account loans cannot be extended

*annual interest rate

What happens if you can't repay a payday loan?

If you cannot repay your loan within the agreed limit you will be subject to accruing interest as well as penalty fees. These fees can be between $20 and $50. Remember that for a maximum loan of $1,500 this means that penalties fees are at minimum between 1 to 3% of the amount of the original loan.

There are other serious consequences if you are not able to repay a payday loan. Your bank or financial institution may charge you a fee additional to the fee charged by the lender.

The lender may also:

• contact your place of work
• attempt to recoup the money from your family and friends
• hire a collectors agent to seize your property
• sue you or take you to court

On top of this, interest will continue to rack up on your debt until you pay it. This can easily become what is known as a "debt trap".

If you are experiencing financial hardship debt advisors can help you organize your finances and get back on track.

What are the best alternatives to payday loans?

Payday loans tend to have the highest possible interest rates and the most punitive fees. This is because they expressly target low-income people with bad credit. If you have any kind of asset you could use as collateral it is much better that you seek a secured loan with a registered financial institution.

You could also try to improve your credit score. Take a look at our guide to credit improvement to start improving yours today.

If you become locked in a debt spiral you may want to look into debt consolidation, filing a consumer proposal or declaring bankruptcy.

Before getting a payday loan it is worth considering the following:

• Did you know that when you deposit a cheque you have the right to $100 of that money straight away? If you make a deposit via another method (such as ATM) to have the right to $100 of the amount the next business day?
• If you write to people or businesses you owe money to you may be able to have more time to repay.
• A cash advance on a credit card has a much lower interest rate than that of a payday loan.

If you find yourself not in control of your finances then speak to a financial advisor today.

What should you do if you get a payday loan?

The first and most important thing is to make sure the lender is licensed. To double check if a lender is licensed contact your local Consumer Affairs office.

Secondly, be sure to read the agreement thoroughly and know what you are signing up for. You should ask the lender to specify, in writing:

• all charges, fees and interest
• the date that the loan will be due
• what the maximum cost you could be charged is

Remember to keep copies of all documents, contracts and correspondence. Not doing this may put you at a severe disadvantage if you have problems later on.

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