Things To Consider Before You Avail Payday Loans

Most people with salaries find themselves living from paycheck to paycheck. Although difficult and stressful to manage, people tend to organize their lives in ways that enable them to live this way.

When living like this, major issues can arise, such as when an unexpected event pops up and messes up your budget, like an expensive medical bill or a home repair bill. When you don’t have an emergency fund to pay off such unexpected expenses, you might turn to your family or friends for support. But, for a lot of people, these options may not be available.

What Is A Payday Loan?

In this case, taking out a payday loan could mitigate the situation. Also known as cash advances or payday advances, payday loans are low balance, short-term loans that are given out at high-interest rates. These loans are designed to be flexible because they allow the borrower to take small amounts for a couple of weeks.

What accentuates these loans over others is that the process of procuring them is straightforward and it doesn’t demand a lot of effort from the borrower. Many payday lenders promise cash within 24 hours and an immediate decision. Also, a lot of these lenders are now available 24 hours a day, 7 days a week, making it possible for people to apply whenever the need arises.

There are plenty of lenders in the market who give out these loans. But this process has become simpler because of the internet and the speed at which these payday loans can be procured. By applying online, it becomes more convenient for borrowers to have money quickly, at short notice.

With some lenders, all you have to do is log in to the website or download the app, fill out a form, provide your identity and address proof, and upload your latest bank statement or payslip.

Payday loans can be taken out quickly if the applicant is employed. A payday loan intends to provide the borrower with quick cash to help them over a short period until they receive their upcoming paycheck.

Things To Consider Before Applying for Payday Loans

According to a report, 43% of millennials are now using payday lenders, and this usage has become more rampant than it was just 10 years ago. These figures have become a reality because of the nature of a payday loan – it doesn’t take into consideration your credit score and you don’t even require a credit history to apply for these.

Additionally, since these lenders don’t pull your credit, it means there’s no hard credit inquiry placed, so your credit score doesn’t get impacted. This, however, has other implications because your credit score doesn’t improve either.

Let’s take a look at a few things before you decide to avail a payday loan:

1. Understand Your Financial Situation

The fact that you’re planning to apply for a loan means that you’re already in a financially tight spot. Despite that, you must gauge your financial situation before taking out a payday loan. Payday loans have high-interest rates, with the average being around 400%.

To put that in perspective, most personal loans only charge somewhere between 4% to 36% interest, and credit card interests charge between 12% to 30%.

For example, if you needed $300 for house repairs, then you could get a payday loan for 2 weeks from a lender. If an annual interest rate of 442% is charged on this, then you would be paying $51 in charges. So, after 2 weeks, you would owe $351 to the lender. If the amount is not paid in time, a penalty of $40 could be charged, resulting in you owing $391.

Before taking out the loan, take time to calculate whether you’ll have the money plus interest next month. Also, take into consideration whether there will be more income coming in from other streams, or whether there will be more expenses in other areas.

In Canada, depending on the province, not managing to pay back the loan in time can result in the following consequences:

• You may have to pay late fees to the lender.
• The loan amount and the fees continue to grow.
• The payday lender might get in touch with a collection agency regarding this and it could be negative for your credit report.
• The lender could sue you for the debt. They could also take the issue to court to receive money from your wages (wage garnishment).

You could use online tools to calculate the required rate of return. Across the world, the standard scale used to find the needed rate of return on loans is the Capital Asset Pricing Model (CAPM). Some new models have now been introduced to help with this, but CAPM remains popular because of how simple it is to use.

CAPM quantifies the risk linked with credit and converts it into the returns associated with the security. Using this model to calculate the practicality of the loan could help in arriving at a sound decision.

Before applying for a payday loan, calculate whether you’ll be able to pay it back or not. You must have a clear repayment plan before applying for a loan. Not having clarity about this could result in you getting trapped in a vicious cycle of borrowing and debt.  

2. Compare The Interest Rates

When it comes to applying for a loan, proper research can help you save a lot of money and effort. With a lot of lenders offering online payday loans in Canada, and anywhere in the world, it’s much easier to compare their interest rates and select one that has the least rate of interest.

There are other aspects that should be taken into consideration, too, like the ease of access and the simplicity of application and approval. But the interest rate would have to take priority over other aspects, depending on where you’re positioned financially.

3. Know The Terms and Conditions

Having an understanding of the terms and conditions is vital when applying for a payday loan, especially when you’re doing it online. Thus, make sure to read through the terms and conditions.

Not being clear about this can prove to be counterproductive for you and create complications later. If you are unsure about the financial clauses and are having difficulty understanding some of the terms, you must reach out for expert help and guidance. A lot of websites now provide resources for people to understand payday loans better.

You must also keep in mind the following things that payday lenders cannot do:

• Lend you more than 50% of your net monthly salary.
• Charge you more than $15 in fees for every $100 that’s borrowed.
• Provide you with a new loan before the previous one is settled. If you approach multiple lenders for loans, they must ask you if you have already procured a loan from elsewhere. In this case, you would have to provide proof of having paid off the other payday loans.
• Ask for collateral, like property or items, that the lender can take over from you if the loan isn’t paid.
• Ask you to bring a guarantor – someone who promises to pay off a loan in case you’re unable to do it.
• Present to you other services, like selling gold, while discussing a payday loan.

Laws and conditions surrounding payday loans tend to vary from province to province. A lender can’t extend or roll over the payday loan in the following provinces:

• Ontario
• British Columbia
• Saskatchewan
• Alberta
• Nova Scotia
• New Brunswick

In the following provinces, lenders can’t ask you to sign forms that transfer your wages to them directly:

• New Brunswick
• Ontario
• Saskatchewan
• Alberta
• Nova Scotia
• Manitoba
• British Columbia

There are even laws for what a lender is allowed to do while trying to collect the loan, including the frequency in which they can contact you and what methods they employ to procure the amount due. Such laws exist in the provinces below:

• New Brunswick
• Ontario
• Manitoba
• Alberta
• Nova Scotia
• British Columbia
• Saskatchewan

4. Eligibility

The requirements to apply for payday loans may vary from one company to another. The general requirements are being at least 18 years old, having a valid ID, having a bank account, and having a steady source of income.

But there can be additional requirements, like the following:

• Having a Canadian residency
• Having employment within Canada
• Having an open bank account with a Canadian bank or credit union
• Being able to send a screenshot or photo of mandatory documentation for the payday loan application
• Having an active email account that you have full access to
• Having a phone number that can be used to contact you

Bottom Line

Payday loans operate very differently from normal bank or credit loans. Although it’s simple to borrow these loans, you must ensure to take only the necessary amount. You must also conduct thorough research before taking the loan.

Being aware of all the terms and clauses related to the loan would help you to make an informed decision – one that helps you out of your situation, rather than trapping you deeper in debt.