Confused About A Payday Loan Consolidation? You’re Not Alone.
Is a Payday Loan Consolidation the Right Option for You?
Payday loans, cheque cashing outlets, alternative lenders: to franchise owners, their easily accessible loans are an essential service for consumers with bruised credit or little borrowing history. For our financial counsellors; they see the damage these types of debts can take on a person who is struggling to pay for their monthly expenses on a daily basis. Critics see these alternative lending services as a predatory menace targeted at low-income neighbourhoods and its residents. Like we say in our financial literacy seminars, “You don’t see too many payday loan outlets in Rosedale or The Bridle Path.” But that doesn’t mean that all middle and high-income earners are averse to using these services either. According to the FCAC’s 2016 national survey, 20 percent of payday loan borrowers earned between 80 and 120 thousand dollars or more annually.
A borrower’s annual income is not the problem. The circumstances that lead to high-risk borrowing are much more telling. Take a person that’s already struggling to pay for the monthly necessities, throw in one of life’s many emergencies, and compound that with a high-interest rate debt and lack of rainy day cash and what you’ve got is a perfect recipe for a financial crisis. Often that same consumer, driven by the need to fix a broken car or keep a utility bill up to date, has taken multiple payday loans spread across 2 or 3 payday lending companies in their neighbourhood. When the interest fees and charges finally get to be more than they can handle (financially or mentally), it may take months for them to seek out the help of a non-profit credit counsellor or insolvency trustee. Often they start by looking for a payday loan consolidation so they can finally put an end to this vicious cycle of debt.
So what is a payday loan consolidation? Well, that description is a bit of a misnomer. In fact, many types of unsecured credit (credit not backed by collateral) can be consolidated including some payday loans, credit cards, and utility and cell phone debts that are in collections. Still confused? Don’t be. Payday loan consolidations aren’t technically a real thing, but debt consolidations very much are, and often payday loans that have gone delinquent can be included within them.
There are many different names for similar restructured consolidation payment plans out there, many of which can be consolidated payday loans. Typically debt management programs, orderly payment of debts (in Alberta, Saskatchewan, Nova Scotia and PEI), or debt consolidations allow debtors to make one monthly payment to their unsecured creditors at reduced interest rates, sometimes for as low as 0 percent (5 percent for OPDs) if they can qualify for the program.
Consumers often confuse debt consolidation programs with debt consolidation loans. Although this is an understandable mistake, they are entirely different approaches to debt management. If a debtor has a good enough credit score and can get approved for a consolidation loan, then a lender will provide the debtor with a loan large enough to pay off all existing debts. To make this offer attractive to debtors, the consolidation loan lender will charge an interest rate lower than what the debtor currently paying on existing debts. For example; if you owed 20,000 dollars on five credit cards with interest rates ranging from 25 to 30 percent, you might be approved for a consolidation loan of 20,000 dollars at interest rates ranging from 7 to 14 percent. For some debtors, this is a valid strategy for freeing up some cash flow to make larger payments on their highest interest debts.
But that doesn’t mean the news is all doom and gloom. Recently the rules have changed for payday lenders. In a bid to curb the rising personal debt levels these types of short-term high-interest loans can cause, provincial governments across Canada are adopting a standardized fee ranging from 15 to 25 dollars for every 100 dollars borrowed. Keep in mind, much like credit card cash advances, this interest fee will be charged daily for the duration of the term, typically 14 to 90 days.
This means that often an average 300 dollar payday loan can have an annual percentage rate (APR) well in excess of 400 or 500 percent. This leads many unfortunate lenders searching for a payday loan consolidation or a debt repayment option which may make an already bad credit score even worse.
Speaking with the Globe and Mail last December, one franchise owner that operates eight payday lending locations across Canada contends that the new regulations have squeezed them so hard that they’re “fighting for survival” to provide what they maintain is an essential service.
Traveling to and from the financial literacy workshops we deliver to youth groups and various organizations across the GTA, I’ve been seeing the payday lending industry’s response to these new fee regulations plastered on signboards outside these outlets:
“NEW LOWER RATES! Only $15 for every $100 Borrowed! First Loan Free! Details Inside”
Now, as much as it pains me to do so, I do agree with the payday lending industry stance that borrowers aren’t taking money for discretionary or entertainment spending. But it also highlights the importance of planned spending and emergency savings for every individual, regardless of income level.
Emergency savings accounts are often easier to fund than most people realize. For those without a defined financial goal, here’s one. I challenge you to get one thousand dollars in a TFSA and tell me you don’t sleep better at night knowing it’s there for life’s unexpected expenses. Yes, a thousand dollars isn’t much in terms of an emergency savings account, but it’s an achievable financial goal for most. Two thousand dollars would be safer, but if you can do five thousand dollars, why not? It may take you three years to get that thousand dollars in your TFSA, which is less than 3 dollars a day. And keep in mind 3 bucks doesn’t buy much anymore.
Don’t have a TFSA? Congratulations, you now have two easily achievable financial goals you can knock off. Go to your bank or financial institution and set one up, it’s free. Many banks even let you set one up completely online as long as you have an existing account there.
“But how can I fund my account? I don’t make enough money.” The answer is a lot simpler than most people realize. That being said, simple is not always easy. So here are my tips to make funding your emergency account a little easier.
Start a Monthly Budget
Not good with numbers? Couldn’t pass that grade five math test? Well then grab a calculator and answer this equation:
Income – Expenses =?
This will be your first step towards creating a workable monthly spending plan.
Pay Yourself First
Start by earmarking five percent of your monthly income for savings. Do it for every source of income you receive: wages, tax refunds, bonuses, etc., After a few months, review your savings goal. Was five percent too much? Try three percent. Didn’t notice that five percent missing at all? Then try six percent next month, aim for ten percent if possible.
Bi-Weekly Pay Cheque Planner – if paid biweekly.
Assign your bills to your pay periods. Payday one – what will you pay off? On payday two – what else needs to be paid off? If you can afford your monthly expenses with two pay cheques per month, congratulations, you can fund the account. On the two months each a year when you’ll receive a third monthly pay cheque (given there are 26 biweekly pay periods in a calendar year), that money can then be used to fund your account or put towards your financial goals.
Use Your Windfalls
Have you recently received a tax refund, inheritance, bonuses or any other lump sum influx of cash? Use some or all of those funds to build your emergency savings account.
Any of these strategies will help you avoid the feeling that payday loans are essential services that are there when you need them. By also creating a workable monthly budget you’ll be able to tell your money where to go so you can stop wondering where it went. You’ll also rest easier at night knowing that you won’t need to hurt your credit by looking for a payday loan consolidation or seeking the services of a licensed insolvency trustee.