It is a good habit to list down our expenses before payday comes. But, our spending tends to exceed our budget at times. Surely, everyone has experienced running short of cash at some point. That is why we must draw the line between our needs and wants.
Emergency expenses often come when we are not prepared. Sometimes our salary and savings are not enough to cover them. It is even more frustrating when we use up everything and go back to zero. As such, we are forced to borrow money to survive.
We can’t always rely on our family and friends, especially when they are also having a hard time. Borrowing from banks can be pretty challenging due to the strict guidelines. For many low and middle-income households, payday loans are their usual choice. In this article, we will discuss the costs and benefits of borrowing from payday loan lenders.
Payday Loans in Canada
Payday loans are short-term loans with high interest based on the borrower’s income. From the word itself, these loans are usually repaid on the borrower’s next payday. Because these are unsecured loans, collateral is not required. During the pandemic, the industry became a popular choice for many borrowers.
In contrast to banks, payday lending does not set a minimum income requirement. As such, low and middle-income borrowers turn to these lenders. A survey in 2017 found out that 53% of Canadians with payday loans were lower-income borrowers. Given this, the industry has ballooned to over 1000 retail outlets in recent years.
In 2020, business shutdowns and unemployment increased. As the recession started, the interest rates dropped to almost zero. Borrowing remained challenging, though, as rising loan losses increased.
Good thing, payday lenders acted as providers of financial assistance to many households. Borrowing was easier even without collateral. In a recent Toronto survey, 80% of borrowers used it to cover household expenses. Moreso, 40% of them went to payday lenders when banks refused to lend money to them.
Yet, controversies continue to surround the industry. Some people treat payday lending as predatory lending. Perhaps that is the price they have to pay for a convenient application for unsecured loans. But with the good things they continue to show, do the benefits outweigh the costs?
Costs and Benefits of Payday Loans
Payday loan believers say it grants poor households greater access to unsecured loans. But for the skeptics, payday loans trap the borrowers in lengthy loan cycles. Given this, here are the costs and benefits of payday loans.
| Costs and Benefits of Payday Loans | |
| Costs | Benefits |
| ExpensivePayday loan interest can reach 60%. But on average, taking out payday loans in Canada remains at 17%. For example, if you take out $300, you will have to pay $351 after 14 days. But some lenders charge lower interest than the average in Canada. | Accessible Payday loans are accessible across all demographics. Rich or poor, brown, black, or white, everyone can borrow. Payday loan lenders do not check your credit history. Hence, even if you have bad credit, they can grant you loans. But, they also have to determine if you can pay them. Even so, they do not set minimum-income requirements. |
| Access to Bank AccountBorrowers must give lenders access to their bank account. With that, loan payments are deducted from their account. Many lenders will have borrowers write a postdated check to be cashed after the next payday. So, when you don’t have enough funds, you will incur higher overdraft fees and bounced check fees. Lenders will charge you returned payment fees. | Fewer RequirementsUnlike banks, payday loan lenders do not set minimum-income requirements. You only have to be of legal age with a valid ID, a regular source of income, and an active bank account. |
| Predatory TendenciesSome people consider it predatory lending. This is because interest can increase quickly. Moreover, the lender does not check your financial capacity. Hence, if you can’t pay on time, interests and penalties will accumulate. | Emergency CasesIn emergencies, you can quickly borrow money from payday lenders. You only have to submit your application. If you get short of cash, you may apply for payday loans. Also, some companies have lower interest rates than the average in Canada. |
| Lenders Can Sue YouIf you have not paid your loans for a long time, lenders can take you to court. They may file a case against you. Given this, you may face legal expenses and imprisonment. | Fast and ReliableYou don’t have to wait for a few days or weeks for your loan application. In banks, the approval has no guarantee and takes time. Moreso, you can make an online application since some payday loan lenders have a website. |
| They Don’t Help in Credit BuildingIn general, they do not report to the credit bureaus. As such, they only report your loans once they are sent to collections. | Unsecured LoansPayday loan lenders do not need collateral. Even if they have access to your bank account, they will not get your properties if you can’t pay. |
Payday loans have advantages and disadvantages. Despite the issues, the industry remains legal and thriving. You have to assess your finances first before borrowing. As long as you can pay your loans on time, you have nothing to worry about. The world must understand that without them, low-income households have no one to turn to.
