In Canada, over the past year, internet searches for payday loans have been on the rise. They outnumber searches for every other type of loan including mortgages, student loans, consolidation loans, and car loans. However, as you have probably heard, a payday loan is tricky business.
Payday loans, also known as a payday advance, are a quick fix that are very high risk. The reason why they are so popular is due to their size and accessibility. Payday loans are for small amounts, they are extremely easy to qualify for and you get your money right away.
Once you get your paycheck then you pay back the loan. Sounds good right? Not so fast, there is a huge catch. These loans have an average of 400% in interest.
They are marketed as cash advances you can get in an emergency to take you through until payday. However, a lot of people end up becoming dependent on these payday loans to make ends meet. It results in a shrinking paycheck. Each month you have less to spend until eventually, the loan will be the size of an entire paycheck. Countless people have been caught in this upward spiral of debt.
These companies are non-bank lenders and they target the financially vulnerable among society. They are designed to be taken out over a short period of time but users often get caught by unexpected fees. On top of that, even over that short period the 400% interest really adds up. For instance, a loan of $500 will become $1000 over a quarter year. That’s 100% interest in just three months!
Payday loans have also recently become popular in a new demographic. If you have a child in university you need to know that young students who have student loans now use payday loans at an alarming rate. Students get their student loan checks at set times. But sometimes it comes too late for essentials that they need like room and board. As a result, they turn to the quick fix of the payday advance.
These loans have a quick turnaround time for repayment and expensive fees. This often catches up to their financially vulnerable target market. Instead of helping they often plunge the user into deeper debt.
The payday loan is like putting a band-aid on an open wound. It’s a quick fix, not a permanent solution.
In the podcast below, our Licensed Insolvency Trustee, Matthew Fader tackles payday loans, the risks associated with them, and the payday loan debt relief options they offer to clients.
My Payday Loan Has Become An Unmanageable Debt – What Should I Do?
If your own payday advances have gotten out of control it may be time to seek debt help. There are many strategies that can relieve you of your debts. The first step would be to find a Licensed Insolvency Trustee, or LIT for short. These are debt and bankruptcy experts licensed in Canada. They will analyze your financial situation and apply one of the following tactics:
1. Credit Counselling
Credit counselling provides education toward proper money management. They provide advice and guidance that helps you with budgeting. They teach you how to properly use debit and credit cards. Lastly, credit counselling can help you stick to your debt repayment plan.
2. Debt Management
An LIT can help you create a debt management plan. They are designed for people who can still repay their debts over a longer period of time. Your unsecured debts are pooled together into one payment which is divided amongst your creditors.
3. Debt Settlement
A debt settlement refers to a negotiation. You agree to pay a fixed price to resolve your debts with each creditor. Be wary of for profit debt settlement companies. They will charge you for their services to then turn around and refer you to an LIT anyway. Make sure that you go to an LIT first.
4. Debt Consolidation
Debt consolidation is a loan that combines all of your debts into one monthly payment. Having one payment is beneficial because it has the potential to lower the interest you pay each month. However, this tactic is risky and it does not mean your debts go away. You must then stay on top of these payments because personal loans have some of the harshest penalties.
5. Consumer Proposal
A Consumer Proposal is also a legally binding debt settlement that is administered by an LIT. It starts with a negotiation to figure out what you as the individual are willing and able to pay. You will also receive protection from creditors.
You may opt for a lump sum payment that may or may not come from the third party sale of an asset. This lump sum is usually lower than the complete sum of debt. In fact, it is not unusual for the debt to be reduced by 70%-80% using this strategy. You may also opt for smaller payments over a longer period of time. Your LIT will negotiate terms that work for your life to allow you to achieve debt relief.
Bankruptcy is an insolvency proceeding administered by an LIT. It wipes away the vast majority of your debts and can typically be finished in a matter of months. With a bankruptcy, you are not required to pay back your debts that qualify. Instead you may have to surrender any extra assets you have or tax returns you may receive while filing.
During a bankruptcy, you are also given immediate protection from your creditors. This means that they can no longer contact you and any legal action they have against you will immediately halt.
An LIT will be able to determine which strategy will give you the fresh start that you need!
Payday loan companies are so predatory that almost every province in Canada has implemented regulations to protect consumers from them. The regulations put caps on the rates that Payday loan companies can charge. In Alberta, their bill is even called “An Act to End Predatory Lending!”
The only provinces without regulations as of yet are Newfoundland and Labrador. However, this is only because their legislation has been delayed in the courts. While this legislation is a step in the right direction, it certainly does NOT make payday loans any safer.
So don’t get taken in with the convenience and speed of a payday loan, in the end they are not worth it!
Payday Loan Debt Relief Options
Are you wondering which payday loan debt relief option best suits your financial situation? Contact us and book a free, debt relief consultation with one of our Licensed Insolvency Trustees. We can help.