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What should I know about payday loans?

Payday loans are short-term loans with high interest rates. These loans can be expensive and difficult to pay back; it is important to think carefully about whether they are your best option.

Payday loans are often available to people who do not have a good credit rating. They are operated by private businesses that are not regulated by the government. Generally, lenders ask for a pay stub, a bill in your name and proof of a chequing account. These loans must typically be paid back by your next payday or within 14 days. If you change your mind about a payday loan, you can cancel it within 2 days of taking it out.

Interest Rates

Payday lenders can charge a maximum of $15 for every $100 they lend. Therefore, if you need to borrow $100, you will have to pay back $115 if you pay your loan back on time.

This interest rate of 15% is much higher than for most other types of credit. Unlike other types of credit, paying the loan back on time will not improve your credit score.

What happens if I can't pay back the loan?

You may have to pay another fee to the lender if your cheque or pre-authorized debit repayment does not go through. In addition, your bank could charge you a fee as well. Your loan will become harder and harder to pay back as interest grows.

After some time of not being able to pay back the loan, the lender or a collections agency will try to contact you. They could contact your employer, friends and neighbours in order to get in touch with you. The lender or collections agency could sue you for the amount you owe including interest. This could be very expensive and could damage your credit score.

What should you consider before taking out a payday loan?

• Do you absolutely need this loan? If you can pay your expenses later or get money from another source, it is best to avoid these loans.
• Are you able to access another form of credit? There are cheaper ways to borrow money such as getting a line of credit, a credit card advance or another type of loan from your bank. If you are eligible, these loans are not as expensive.
• Do you understand all the fees involved? Make sure that you understand all the costs, including the costs if you are not able to pay back the loan.
• Are you able to pay back the loan in full? It can be very expensive if you cannot pay back the loan on time. It also may be hard to keep up with your other daily expenses when you have to pay back the loan with interest.
• Have you read and understood the loan agreement? You will need to sign a loan agreement when you get your loan. Make sure to read this carefully and keep a copy for yourself.

Where can I go for help?

If you are having difficulty paying your bills or are having problems repaying your loans, you may want to contact a credit counsellor.

If you would like information about the rules for payday loan companies or if you would like to file a complaint, contact the Ministry of Government and Consumer Services. 

For More Information

• Newcomer’s Guide to Consumer Protection - A guide that contains useful information for newcomers about buying goods and services. From Consumer Protection Ontario.
• Pay Day Loans: An Expensive Way to Borrow - Information on your rights with payday loan companies and how interest accumulates through these loans. From the Financial Consumer Agency of Canada.
• Collection Agency: Your Rights - This webpage explains what a collection agency is and what you should do if one contacts you. From the Ministry of Government and Consumer Services.
• My bills are bigger than my income and I can't seem to pay off my debts. Could I get help? - An article on the benefits of credit counsellors and the importance of managing debt carefully. From Settlement.Org.
• Money Management Tools for Newcomers - An assessment of your Canadian financial literacy skills and advice on how to improve them. From Prosper Canada.