Why You Should Never Get a Payday Loan (Canadian Edition)
What Is a Payday Loan?
Payday loans are simply loans for small sums of money—even as low as $100—that consumers take out in order to help them with necessities until their next paycheque.
It sounds like a good idea, but it's not. In Ontario, Canada, many payday loan companies advertise something along the lines of: "Borrow $100 for $15"—this sounds cheap until you understand that it's only for 14 days (two weeks).
How Much Do Payday Loans REALLY Cost?
How do Percentages Work?
In order to understand interest rates, you need to understand how percentages work and what they mean. This is easier than it sounds. The gist of it is as follows:
100% = 1
Therefore: 100% of $100 is $100
100% of $300 is $300
100% of $950 is $950
Next, 50% = 0.5, or 50% = half, or 0.5 = half
Therefore: 50% of $100 is $50
50% of $300 is $150
50% of $950 is $475
Then, 200% = 2, or 200% = double, or 2 = double
Therefore: 200% of $100 is $200
200% of $300 is $600
200% of $950 is $1900
What about something closer to the interest rates that payday loan places charge?
300% = 3, or 300% = triple, or 3 = triple
Therefore: 300% of $100 is $300
300% of $300 is $900
300% of $950 is $2850
I'm sure you wouldn't want to borrow $300 at 300% interest rate and end up paying back $900, yes?
Understanding WHY Payday Loans Are a Rip-Off
The main thing you need to know in order to understand why payday loans are such a rip-off is something called APR, or annual percentage rate.
APR is a measure of how much extra money has to be paid over the course of ONE YEAR. That's right, one year or 12 months or 365 days. NOT 14 days or two weeks or even two years. ONE YEAR.
Credit cards, for example, charge around 23% APR when you take a cash advance or use the card to buy something and do not pay back in full. So, if you spent $100 on a credit card, and didn't pay back for one year, you'd have to pay $123 to clear off your balance (of course, however, credit cards require minimum monthly payments).
If you have money and put it in a savings account, the bank will probably pay you 1.5% APR, which means that if you left $100 in a savings account for one year, you'd have $101.50 at the end of the year.
So... what is the APR for payday loan companies? 391%!!!
If you borrow $100 from a payday loan company and pay them back $115 ($100 loan + $15 interest) after 14 days... it seems like you only paid 15% interest, right? WRONG! The interest rate is calculated based on a period of one year, which is why it is called the annual percentage rate or APR.
There are 52 weeks in a year, so divided in half, that's 26 periods of 14 days... which means that if you want to know the APR of the loan just mentioned (borrow $100 for $15), the math is: $15 x 26 = $390. So, if you borrowed $100 for ONE YEAR from a payday loan company, you would owe them $490 at the end of the year ($100 loan + $390 interest).
Pretty bad deal, right?
Information From the Ontario Government
Alternatives to Payday Loans
You should do everything in your power to avoid borrowing from payday loan places. Don't just cave in and think that it's an easy route out... because at the end of the day, you will lose more than you gained.
Do you have family or friends that you can borrow from? Do you have bank loans or credit cards that you can borrow from?
Can you make do without whatever it is you're needing to borrow money for?
If bills are due and you don't yet have the money, you can always call the respective companies and let them know; virtually all companies are willing to give you some more time to pay your bills, as long as you let them know.
If an automatic debit is coming out of your account and you don't have overdraft, you can even go and speak to your bank manager and ask them to perhaps extend you a temporary overdraft.
If you have really run out of options, it would actually be wiser to just be late on paying your bills and pay them when you can. Yes, banks charge hefty NSF fees ($48 NSF fee at most Canadian banks these days), but if you talk to your bank manager about your situation, they are sure to cut you some slack.
Do you need money for food? Find your local food bank or other charity and you are sure to be helped.
If any of these situations happen to you again and again... and you find yourself constantly turning to payday loan places... you really need to cut back on your spending. A dollar here and a dollar there really adds up. Write down everything you buy and you will be shocked at how much money you spend—and how much you waste.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2019 S Chon