In a troublesome trend, more and more Canadians are turning to high-interest rate payday loans in an effort to meet their spending needs, leading them into a financial mess.
According to a recent study conducted by the Financial Consumer Agency of Canada (FCAC):
- The most recent stats show that annual payday loan use grew to 4.3 per cent, alongside household debt clamouring up to a whopping 165 per cent of household income
- A large number of payday loan users are not aware how expensive these loans are. Forty-eight per cent didn’t realize that (varying depending on province or territory) payday loan charges can add up to an annual percentage rate of 500 percent
- Why are people turning to payday loans? The vast majority (89 per cent) said that they took out the loans (which typically are $500 or less) to cover unexpected expenses, other expenses or to avoid late charges on bills
“There is a clear relationship between high-interest debt like payday loans and crushing levels of household debt. Once you start adding to that debt pile, it’s hard to reverse the trend,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
“These payday loans (and all of their hefty interest charges) can be avoided altogether by understanding your options and planning ahead. Given that these payday loans are usually for a relatively small amount, there are a number of options available that don’t involve huge interest charges or adding to a growing mountain of debt,” says Schwartz.
Here are some tips on how to avoid payday loans.
Call your own bluff
It’s just this once. It’s not for that much. I’ll pay it back right away, so what’s the difference? This is just faster. I don’t have any choice
These are common rationales for taking out payday loans. If you are cycling through any of these thoughts, it’s time that you faced the hard facts of high interest debt.
If you are using a payday loan to avoid late charges, you are essentially taking out one debt to pay another, which is going to push you backwards down the debt pile.
If you don’t have any cash on hand to cover unexpected expenses, chances are you won’t have the money on hand to pay off the payday loan quickly. As interest accumulates, that “small” loan balloons, causing you to effectively pay a substantial amount over the long term for that short term solution.
Set a low debt, high savings budget
Admittedly, this is a longer term solution, but it is one that can steer you away from payday loans for good. Ideally, you should have some savings put aside in the event that you encounter unexpected expenses.
If you’ve got open credit available to you, be warned that a cash advance on your credit card will start to accumulate interest as soon as you take it out, even if you pay it off right away. Use cash whenever possible.
Cash flow conundrum
If you are struggling with cash flow to cover expenses, consider consolidating your debts. This will combine your debt payments into one, which means less interest costs and more cash flow for you.
Do you feel like you’ve run out of financial options? You will only benefit by taking control of your debts once and for all. Call one of our trained credit counsellors at 1-888-294-3130 or get started with our online debt analysis.