You came up short again and you're wondering what to do. Is a payday loan a quick way to fix debt? Or a source of more financial worry? Here's what you should know.
These days, people of all backgrounds can get caught in a tight place. An unexpected car repair comes up, but your last freelancing invoice won’t be paid until the end of the month. Or your ex-spouse is unable to keep up with the child support payments, and you really need to get the kids winter coats right now.
If you, too, are having trouble making ends meet, you may be looking around for some long-term solutions. Can payday loans help you get out of debt? Before you turn to that option, here's what you should know.
What is a payday loan?
A payday loan, also known as a short-term loan or cash advance loan, is an amount of money that a private company is willing to lend you for a short time, until your next payday. In general, these lenders provide loans ranging between 30 and 50 per cent of your net salary. There are usually two options for repaying the loan:
- You can give the lender a postdated cheque that covers the loan amount and all fees incurred. If you don’t return in person to repay the loan, the company cashes the cheque.
- You can give permission to have the amount automatically withdrawn from your bank account on the date of your next pay.
Too high a price to pay?
Although a payday loan may be tempting, keep in mind that this type of borrowing is actually very costly. And can payday loans help you get out of debt? It’s not very likely.
- You risk accumulating even more debt if you’re unable to repay the borrowed amount on the agreed maturity date.Plus, even if you manage to pay off your loan, you’re just as vulnerable to coming up short as before. It’s a vicious cycle in which you may have to take another payday loan, which starts a cycle.
If you’re already in this kind of situation, talk to a debt or credit counsellor. With some solid advice and workable strategies, you may soon be able to work your way out of debt once and for all.
Don’t sign a loan contract without reading it first
A payday loan should be considered a last resort. Never sign a contract without reading it in full, otherwise the extra costs you are agreeing to may catch you by surprise. They can include:
- Fees for opening a file
- Administrative fees
- Late penalty fees
- Interest fees
These fees are on top of the already-high interest rates charged on payday loans, and can quickly add up to something way more expensive than you can handle.
Be aware and be prepared
According to the Financial Consumer Agency of Canada, a payday loan can amount to borrowing at an interest rate of around 450- to 650 per cent! Or even more in some cases.
- Before you sign, make sure you know the total amount you have to pay back and keep a copy of the contract. Then, bepreparedto payit back when the time comes.
Other solutions
If you think that only payday loans can help you get out of debt, have you considered the alternatives? Here are a few that cost a lot less.
- Bank account overdraft protection allows you to overdraw at a much lower interest rate.
- A personal line of credit can be used as needed and either repaid in increments every month or whenever you’re able.
- A cash advance on a credit card costs a lot in interest. However, the rate may still be lower than that of a payday loan.
