Payday Loans

What is a Payday Loan?

A payday loan is a short-term loan of up to $1,500 that must be repaid on your next payday. It is very expensive. Because it must be repaid over a short time, budgeting for it can be difficult.

You must repay a payday loan, plus any interest and fees, on your next payday. If you don’t, there will be more interest and fees added to it, increasing your debt. Even if you do pay a payday loan on your next payday, the high cost of using a payday loan will mean you have a lot less money left to live on. This can lead to a cycle of taking out payday loans over and over.

There might be alternatives to a payday loan available to you. If a payday lender charges you the maximum amount allowed in British Columbia ($15 for every $100 borrowed, as of September 1, 2018), this can greatly reduce the amount of money you keep from your next paycheque. For example, let’s assume you borrow $300 and your paycheque is $1,000 after taxes and other deductions – you will only keep $655 from your paycheque after repaying the loan:

 

Amount of Payday Loan

Total Interest and Fees on the Loan

Total Amount Owing

(Loan Amount + Interest and Fees)

Your Next Paycheque

(After Taxes and Deductions)

Amount You Have Left After Repaying the Payday Loan

($1,000 - $345)

$300

$45

$345

$1,000

$655

*A two-week payday loan equates to an annual percentage rate (APR) of nearly 400%.  This is much higher than a credit card APR which typically ranges from about 12%-30% and much higher than the criminal rate of 60% allowed under the Criminal Code of Canada. Payday loans in Canada are allowed in provinces (under section 347.1 of the Criminal Code), where there are provincial laws in place to regulate them. There are legal protections in place by law if you borrow money using a payday loan in British Columbia.

When you borrow a payday loan, you will need to provide something to guarantee it will be paid back. This is usually a post-dated cheque or pre-authorized debit (permission for the lender to take the amount owing from your bank account).

Borrower Beware: What to Ask About a Payday Loan

As payday loans are a very expensive type of loan, they can be very risky for the borrower. If you are thinking of using a payday loan, there are things to think about. Also consider your rights and whether alternatives might be available to you.

Beware of "lead generators" when applying for a payday loan.

Why do People use Payday Loans?

People use payday loans for many reasons – including covering unforeseen emergency expenses or a job loss, or even trying to make ends meet between paydays. To reduce your chances of getting into a cycle of debt you can’t manage, try to avoid using payday loans, especially for ongoing regular costs such as rent or groceries. Try to budget for these expenses and have a bank or credit union account set aside as an “emergency fund”. Put a small amount of money into the fund regularly – whatever you can manage – to cover unexpected costs.

What will a Payday Loan Cost Me?

Payday loans are very expensive compared to some other loans. To see what a payday loan will cost you, use the Payday Loan Calculator.

By law in British Columbia, the most that a payday lender can charge is $15 per $100 you borrow, as of September 1, 2018. Although this might not seem like much, a payday loan must be repaid over a short time, meaning that you won’t be able to make your payments more affordable by spacing them out. This can greatly decrease the amount of money you keep from your next paycheque. For example, let’s assume you borrow $300 and your paycheque is $1,000 after taxes and other deductions – you will only keep $655 from your next paycheque after repaying the loan:

 

Amount of Payday Loan

Total Interest and Fees on the Loan

Total Amount Owing

(Loan Amount + Interest and Fees)

Your Next Paycheque

(After Taxes and Deductions)

Amount You Have Left After Repaying the Payday Loan

($1,000 - $345)

$300

$45

$345

$1,000

$655

If your payday loan isn’t paid on time, you will pay additional fees. These will accumulate interest, making your financial situation worse.The table below shows the cost of a $300 payday loan, compared to the typical costs of some other types of loans for the same amount.

 

Type of $300 Loan

Interest and Fees

Amount Owing After 14 Days 

Payday Loan

$45

$345

Line of Credit

$5.81

$305.81

Overdraft Protection

$7.19

$307.19

Cash Advance on a Credit Card

$7.42

$307.42

Unlike a payday loan, the other types of loans can usually be paid back over a longer period of time. For comparison purposes, the table above shows the amounts owing after 14 days.

The costs shown are for illustration purposes only. They assume:

  • A payday loan with a cost of $15 per $100 borrowed, which is the same as an annual interest rate of 391% if you get a paycheque every two weeks
  • A line of credit includes a $5 administration fee plus 7% annual interest rate on the amount borrowed
  • overdraft protection includes a $5 fee plus 19% annual interest on the amount borrowed
  • A cash advance on a credit card includes a $5 fee plus 21% annual interest on the amount borrowed

What if I Don’t Pay Back a Payday Loan on Time?

Before borrowing a payday loan, be sure that you can pay it back on time. If you don’t:

  • The payday lender can charge you a one-time fee ($20 for a dishonoured cheque or pre-authorized debit), and they are allowed to charge you a higher interest rate on the outstanding amount owing (it can’t be more than 30% per annum on the outstanding principal)
  • Your bank or credit union will most likely also charge you a Non-Sufficient Funds (NSF) fee or an overdraft fee (if you have an account with overdraft protection), if there isn’t enough money in your account when the payday lender tries to withdraw what you owe. These fees can be high - an NSF fee typically ranges from $25-$48. This can also negatively affect your credit score. Interest will keep accumulating on the amount you owe (including on fees)
  • The loan might be assigned to a collection agency, which could negatively affect your credit score

Payday Loans – What are my Rights?

In British Columbia, there are a number of protections for payday loan borrowers. When taking out a payday loan in British Columbia, you have the right to:

  • Cancel the loan within two full business days, without paying any penalties
  • Repay the loan early, without paying any penalties

British Columbia law requires a payday lender to:

  • Give you a written loan agreement that includes specific information, including:
    • The payday lender name, address, contact information and license number
    • Your name
    • A statement that it is a high-cost loan
    • Cancellation rights
    • The amount borrowed before interest and fees (known as “the principal”)
    • The total amount you owe, (including interest and all fees)
    • The date that the payment or payments are due, and term of the loan
    • Your options if the payday lender doesn’t meet their obligations

By law in British Columbia, a payday lender must:

  • Publicly display the cost of their loans. The most you can be charged for a payday loan in British Columbia is $15 per $100 borrowed (as of September 1, 2018), which equals an annual interest rate of 391% (on a two-week loan) – much higher than most other types of loans
  • Let you repay the loan over two or three pay periods if you are borrowing your third loan from them in the last two months
  • Be licensed by Consumer Protection BC, and clearly display their license number (this includes online payday lenders)

A payday lender in British Columbia, or one that provides loans in British Columbia even if located elsewhere, is not allowed to:

  • Give you more than one loan at a time
  • Roll over an existing loan into a new loan with new charges
  • Give you a loan for more than 50% of your paycheque
  • Make you buy insurance for the loan
  • Charge you extra to put the loan on a cash card
  • Make you pay upfront for the loan
  • Ask, or require, you to let them use or share your personal information for any reason other than arranging or providing you the loan

More information can be found on the Things to Think About When Considering a Loan or Other Financial Service page.

Who can I talk to if I have concerns about a Payday Loan or a Payday Lender?

In British Columbia, payday lenders are required to be licensed by Consumer Protection BC, which also inspects payday loan businesses, responds to consumer inquiries and investigates alleged violations of consumer protection laws. 

If you have questions or concerns about a payday loan or a payday lender, you can contact Consumer Protection BC at info@consumerprotectionbc.ca or 1 888 564-9963 (toll-free).