Canadians are feeling the strain of an increasingly expensive economy, and many may turn to credit or, in some instances, payday loans, to help get by.
In this post, we’ll explain the difference between the two, and what you can do to help get through difficult financial situations.
What’s a payday loan?
A payday loan is a short-term loan offered through an alternative lending company. You can borrow up to $1,500, and you’re typically expected to pay it back within a short time frame, often by your next paycheque (hence the name). Unlike credit cards, there’s sometimes no credit check required. Plus, you can access your loan right away, as it’s often either transferred to your bank account, given to you in cash, or placed on a prepaid card.
When it comes to paying back your loan, the lender may withdraw the total amount due on the payment due date from your bank account. You may set up a pre-authorized debit or provide a cheque that’s post-dated with the payment due date.
What’s the catch?
Fast cash and the possibility of no credit check? Sounds alright. And maybe a little too good to be true.
Payday loans are expensive. You’re charged a fee, sometimes as much as 21% of the amount you’re borrowing. So if you’re taking out $300, you can expect to pay upwards of $63 on that amount when it’s time to pay it back.
If you don’t pay off that loan by the agreed upon due date, you’ll face additional charges, and you may find yourself in deeper debt than you bargained for.
While payday loans can be a temporary solution, they won’t help you build or rebuild your credit – generally speaking, repayments aren’t reported to credit reporting agencies. See the chart below to learn more.
What’s the difference between a payday loan and credit card?
A short-term loan.
Generally, must be paid back on your next paycheque, and you’re charged a fee on the amount you’ve borrowed.
If you don’t pay your loan back by the payment due date, you can face additional charges.
There may be no credit check. In some cases, you can walk into a payday lender and access your funds almost right away. However, you may be required to provide recent pay stubs and bank statements to prove that you can make good on your loan when it comes due.
Generally doesn’t count towards your credit report unless you fail to pay back the loan.
A form of payment that allows you to buy things today, and pay for them tomorrow.
You typically have around 21 days to make at least the minimum payment required towards the credit you’ve used. This period is known as the interest-free grace period, and it begins on the last day of your billing period (you can find your billing period on your credit card statement).
Note: The interest-free grace period does not apply to cash advances, cash-like transactions and balance transfers.
You’re only charged interest on any unpaid balance after the interest-free grace period. But if you make your payments in full, you won’t be charged interest.
Credit card issuers like Capital One report your account activity to credit reporting activities every month, allowing you to build your credit history.
What’s the alternative?
Although the cash you receive from your payday lender might give you some immediate relief, the fees may be hard to take on when it’s time to pay it back. Before signing on the dotted line, look into all of your options:
Speak to your employer. They might offer pay advance options or allow you to cash in your vacation days.
Contact your financial institution. They may offer a number of flexible lending options including personal loans and lines of credit.
For the future. Although financial hardship can make it difficult to look ahead, it may be worth thinking about building an emergency fund. We’ve shared a few ideas in this article to get started once you feel you’re in a better place.
If a payday loan is your only option, be sure that you can make good on your loan to avoid finding yourself in deeper financial trouble.
By educating yourself on all of the options available to you, you can make an informed decision about how to help manage financial challenges.
If you’re facing financial difficulties and require support, we encourage you to visit Credit Canada, Canada’s longest-standing non-profit credit counselling organization.