What Are Payday Loans?

Payday loans are short-term, high-cost loans that are usually meant to be repaid by your next payday. They are often used by people who need money quickly for bills, groceries, rent, car repairs, or unexpected expenses.

In Canada, payday loans are usually for smaller amounts and short repayment periods. They may be easy to access, but they can be expensive compared to other borrowing options.

KOHO (Payday Loan Alternative)

KOHO Cover is a payday loan alternative, you can:

• Get up to $250 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 Payday Loans Work

When you take out a payday loan, the lender gives you money upfront. In return, you agree to repay the amount borrowed, plus fees, by a set date.

Repayment is often due around your next payday. Some lenders may require access to your bank account so they can withdraw the repayment automatically. Others may ask for a pre-authorized debit or another repayment method.

Payday loans are usually available online or through storefront lenders. Because they are designed to be fast, the application may focus on your income, bank account, identification, and ability to repay.

How Much Do Payday Loans Cost?

Payday loans can be expensive. In many Canadian provinces, the maximum cost is $14 for every $100 borrowed. That means if you borrow $300, the fee could be $42.

That may not sound like much at first, but payday loans are short-term. When the cost is compared as an annual rate, the Financial Consumer Agency of Canada says $14 per $100 borrowed is equal to an annual interest rate of about 365%.

This is why payday loans are often considered a high-cost borrowing option.

Why People Use Payday Loans

People usually use payday loans because they need money quickly and may not have access to other forms of credit.

Common reasons include:

• Covering rent

• Paying a utility bill

• Buying groceries

• Handling a car repair

• Avoiding a missed payment

• Covering an emergency expense

• Getting through a short gap before payday

Payday loans may also appeal to people with poor credit or limited credit history because some payday lenders may not rely as heavily on traditional credit checks.

Why Payday Loans Can Be Risky

The biggest risk with payday loans is that they can be difficult to repay on time. Since repayment is often due by your next payday, the payment may take a large part of your next paycheque.

If that leaves you short again, you may need to borrow more money. This can create a cycle where you keep borrowing to cover the previous shortfall.

There may also be extra costs if you cannot repay on time. The Government of Canada notes that if you do not make your payment, you may face additional penalties, and the amount you owe can increase.

Payday Loans Vs. Other Borrowing Options

Payday loans are usually faster and easier to access than many traditional loans, but they are often more expensive.

Before using a payday loan, it may be worth comparing:

• A payment extension from your bill provider

• Overdraft protection

• A line of credit

• A small personal loan

• A credit card cash advance

• Borrowing from family or friends

• Selling something you no longer need

• Speaking with a credit counsellor

What To Check Before Getting A Payday Loan

Before taking out a payday loan, make sure you understand the full cost and repayment terms.

Check:

• How much you are borrowing

• How much you will repay in total

• When the payment is due

• Whether repayment is automatic

• What happens if you cannot repay on time

• Whether there are late fees or NSF fees

• Whether the lender is licensed in your province

• Whether there are cheaper options available

A payday loan may solve the immediate problem, but the repayment can create another problem if it leaves you short again.

When A Payday Loan Might Be A Last Resort

A payday loan may be considered only when you have no lower-cost options available and the expense is urgent. Even then, it is important to borrow only what you need and make sure you can repay it on time.

If you are using payday loans often, that may be a sign of a larger cash flow or debt issue. In that case, it may be better to speak with a credit counsellor, review your budget, or contact lenders and bill providers directly to ask about payment options.

Final Takeaway

Payday loans are short-term, high-cost loans that are usually repaid by your next payday. They can be fast and easy to access, but they are often expensive and can be hard to repay on time.

Before using a payday loan, compare lower-cost options like a payment extension, overdraft protection, a line of credit, or a small personal loan. The best borrowing option is the one that helps you cover the short-term expense without making your next paycheque harder to manage.