What Is a Payday Loan?

A payday loan is a small, short-term loan that you typically repay when you receive your next paycheque.

They can provide fast access to money and may not require a traditional credit check, but they are one of the more expensive ways to borrow in Canada.

You can generally borrow up to $1,500 and may have up to 62 days to repay the loan.

KOHO Cash Advance

KOHO Cover is not a traditional payday loan. It is a cash advance designed for Canadians who need a smaller amount of money to cover short term expenses.

With KOHO Cash Advance, you can:

• Get up to $500 as an instant cash advance (amount depends on eligibility)

• Pay no interest on the advance

• Avoid a credit check

• Repay automatically once you add money or get paid

You subscribe to the Cover bundle for a low monthly fee, and in return you get the advance feature plus extras like a credit report, financial coaching, and priority support.

How Does a Payday Loan Work?

You apply with a payday lender for a relatively small amount of money.

The lender may ask for:

• Proof of regular income

• A bank account

• A permanent address

• Authorization to withdraw repayment from your account

If approved, you receive the money through a bank deposit, cash or another payment method.

You then repay the amount borrowed plus the lender's fees according to the repayment schedule. Payday loans are commonly structured around your payday.

How Much Does a Payday Loan Cost?

Payday loans can be considerably more expensive than other forms of borrowing.

In provinces with payday loan regulations, the maximum cost of borrowing is generally $14 for every $100 borrowed.

For example:

If you borrow $300, a fee of $14 per $100 would cost you $42.

You would repay:

$300 borrowed + $42 in fees = $342

Do Payday Loans Charge Interest?

Payday lenders commonly charge a fixed borrowing fee when the loan is repaid on time rather than presenting the cost like a traditional annual interest rate.

However, additional interest or fees may apply if you fail to repay the loan as agreed.

Do Payday Loans Require a Credit Check?

Not always.

One reason payday loans are accessible to some borrowers with poor or limited credit is that lenders may approve applications without a traditional credit check.

Instead, lenders may focus on whether you have regular income and a bank account.

Easier approval does not make the loan inexpensive.

What Happens If You Can't Repay a Payday Loan?

Missing the repayment date can make the debt more expensive.

Depending on where you live, consequences may include:

• Additional interest

• Fees for failed payments

• NSF fees from your financial institution

• Collection activity

• Damage to your credit

• Legal action to recover the debt

Repeatedly borrowing to cover previous payday loans can also create a cycle where more of each paycheque goes toward debt repayment.

Are Payday Loans Legal in Canada?

Yes, but payday lenders are regulated.

Payday lending rules vary by province and territory. In provinces with specific payday lending regulations, lenders must follow rules governing fees and other lending practices.

You should make sure the lender is licensed to operate in your province before borrowing.

What Are Alternatives to a Payday Loan?

Before taking out a payday loan, consider whether a lower-cost option is available.

Possible alternatives include:

• A cash advance

• A personal line of credit

• Overdraft protection

• Asking your employer for a pay advance

• Borrowing from family or friends

• Asking a creditor for more time to pay

• Using emergency savings

Is a Payday Loan a Good Idea?

A payday loan can provide quick access to cash, but its high cost and short repayment period make it a risky option for many borrowers.

Before taking one, calculate exactly how much you will need to repay and whether you will still have enough money left for your regular expenses afterward.

If a lower cost borrowing option is available, it will usually be worth considering before using a payday loan.