Estimated reading time: 6 minutes
Understanding the true cost of payday loans: a quick fix for immediate financial needs, but be prepared for the challenges of repayment.
Payday Loans, Easy Money = Big Problems
We have all run into situations where we need fast, easy money, and if you have no access to a financial institution or a credit card, where do you go?
While Payday loan companies market their business as a convenient and quick way to get some easy money when you’re in a bind, they do not detail how hard they can be to repay.
When I was married, money got tight pretty quickly when my husband got hurt at work while I was on maternity leave.
Bills were falling behind, and every week, it just seemed like a struggle to get through.
Money was always on my mind as I was always figuring out how I was going to buy diapers and milk, and pay the phone bill, among everything else.
One day, my husband suggested a payday loan, and looking back now, I wish he hadn’t.
Convenience of A Payday Loan
The Internet makes almost everything easy these days, including getting a loan.
Suppose you have online banking, and your pay is directly deposited.
In that case, getting a payday loan online is as easy as filling in an application, stating your personal information, employer, and how much money you make.
It’s too easy, and depending on which company and bank you are dealing with, you may have the money as soon as 30 minutes up to 48 hours after being approved.
This money is deposited directly into your bank account.
When things got stressful, I admit I was not always thinking clearly, which sounded great!
Minimal effort was required, and it provided a little financial relief, which unfortunately didn’t last long.
Payday Loan Costs
How much does a Payday Loan cost? Too much!
These companies even tell you this! Money Mart states right on their application, ‘Payday loans are high-cost loans.’
Your first loan with any company is usually a tiny amount, ranging from $60-$300.00, depending on which company you are dealing with.
After successfully paying back your first loan, you are most likely eligible for a higher loan amount in the future.
In Canada, the cost of borrowing per 100.00 dollars varies.
In Alberta, British Columbia, and Saskatchewan, every $100.00 borrowed will cost you $23.00.
PEI is most expensive at $25, Ontario at $21.00, and Manitoba at the cheapest at $17.00 per $100.00 borrowed.
Being in Ontario, we borrowed $300.00, including the cost of lending being $363.00 on a two-week loan period.
I quickly rationalized in my head that I would have enough money to pay this back on my next paycheque, which, at this time, was my maternity pay.
A Payday Loan Is A Continuous Cycle
I did have enough to cover the payment as I knew I would, but now I was left with little money to get by for the next two weeks.
We went from living paycheque to paycheque to our pay being spent before receiving it. So what did we do then?
We borrowed the money again! This pattern continued for a couple of months.
A $300.00 loan ended up costing us over $600.00 by the time we could pay it off.
We paid more than double the borrowed amount in only a few months.
What a waste of money. We could have avoided this if we had a basic budget and were more aware of our spending.
I remember thinking on many occasions that I wished my paycheque wasn’t gone already and still a few days or almost a week before payday.
It was depressing to think that I was constantly behind.
I wanted my paycheque to be mine again, not going to the payday loan company.
It burdened my finances, making it hard to pay some of my other bills and provide for my family.
Saying Goodbye To A Payday Loan
Paying off a payday loan should be a top priority, as saving your money in the long run is in your best interest.
Mr. CBB has many free money-saving tools, which you can download, making creating and sticking to a budget easier.
Making a budget for yourself may be required to pay off your loan, but it is a great tool to avoid needing a loan.
If you cannot repay the loan in full without having to re-borrow, try to lower the amount you borrow each time.
I got serious about getting rid of this debt after handing over $363.00 of my paycheque for a $300.00 loan.
At the time, I only re-borrowed $250.00 with the cost of borrowing, making it $302.50, $200 for the next loan, and so on.
It took some time to pay it off but the amount owing constantly decreased while easing the strain on other areas in our budget.
Although reflecting on how much money we wasted on payday loans depresses me, it was a good eye-opener.
It was also another stark reminder that the need for a budget was crucial.
Creating a budget is the only positive thing that came out of this experience.
As a single mom, my budget helps me avoid needing a payday loan again.
Discussion: Have you ever been caught up in the Payday Loan cycle?
Please share your comments below.
Thanks for reading,
Mr. CBB
Post Contribution:
Katrina is a regular contributor to Canadian Budget Binder and is as passionate about personal finance as she is about gardening. Katrina is a horticulture graduate with over 10 years experience with landscaping and greenhouse production.
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I had a friend who – no joke – used payday loans to get out of debt from other payday loan companies. It was insane. I tried to help her out of it, but it never worked. She’s probably still in that cycle.
Great post! Those payday loan places are everywhere in the city closest to me. Also they are one of the few places hiring new workers!! It’s so sad, honestly.
Katrina!!! Thanks for scaring us away from payday loans forever! Life is hard enough without that particular vicious cycle. Have a will-nilly one!!!
Wow, just goes to show how things can spiral out of control! Glad you’re out of the cycle now.
Whoa good information on the pricing, I have always wondered about that fact. Now is the cost paid up front, or is it interest that you are paying back (and if you pay it down more quickly you “save”)?
The seriousness of this cycle can’t be stated enough. I also got into the cycle of taking payday loans to pay off payday loans. Some of them are 75% extra for the charges. Although the interest rates are regulated — there are admin fees, transaction fees, etc.
It was a scary experience — Even taking less and less didn’t work.
In the end, it caused me to start a consumer proposal. (Although it was not a simple or easy process.) I wish there were some regulatory bodies to govern some of these companies.
Wow !!!! I had heard those things were a mega rip off but you just let me know exactly how bad they are…. I’m hearing on the radio lately of a new company around that does those loans, from England I believe… (Sorry Mr CBB!!!!) these company’s are such bad news and they prey on people in trouble financially. Thank you so much for sharing your story as a warning to us and I’m so glad you were able to get out from under these vultures!!!!! Take care Katrina!!!
Payday loans are dangerous, but I see why people take them out. It is quick access to money, but you certainly pay for it in the end. I have seen many providers that have APR’s as high as 2500%!
Ya, it’s crazy… mate… just nuts!
Thanks for the honesty Katrina! I think the only time I’d suggest a payday loan would be if you’re going to be on the street the next day. Even then it would be the very last option in my opinion. The rates are just crazy and the never ending cycle just makes it next to impossible to get out of.
I had no idea what was a payday loan. Wow, I will definitely stay away from them.
Thanks for sharing your experience. It’s good to see how you’ve turned it into a positive thing in the end.
Thanks for sharing…it happens! I’m glad you learned from it and will stay away from payday loans in the future!
When it comes to payday loans, it is advisable to understand the proper use of payday loans – as solutions for financial problems, and not an easy withdrawal means (like your ATM). It sometimes gets you addicted specially with easy approved loans, and sometimes it makes it less of a last resort type solution – which is something to be careful with.
Thanks for sharing…