Over the last two weeks I have met with a number of people in our Brantford, Ontario office who have loans from payday loan companies. I reviewed one of the loan agreements.
This person had borrowed $270 for a period of twelve days. The “cost of borrowing” is 89 cents per $100 per week, which doesn’t sound like very much. The agreement says that he will repay the company $274.12, for a cost of borrowing of $4.12. The disclosed interest rate is 46.44%.
However, here’s the catch: To repay the loan the borrower is required to give the payday loan company a post-dated cheque for $315.36 to repay the loan. If the repayment is only $274.12, why is the cheque amount $315.36? Why the difference of $41.24?
Simple. In addition to the interest on the loan, there is also “standard first party cheque cashing fee.” Since you are required to give a cheque to repay the loan, the payday loan company charges you a fee to cash the cheque.
This means that you are paying $45.36 to borrow $270 for 12 days. That works out to an interest rate of 511% per year! Now it doesn’t sound like such a good deal.
The maximum interest rate chargeable in Canada is 60% per year, but because you are paying interest and service charges, the pay day loan companies actually charge more than the legally allowed interest rate.
The purpose of this blog entry is not to say that pay day loan places are bad. For some people they serve a useful purpose. One person this week told me that due to past credit problems he doesn’t have a bank account, so pay day loan companies are the only place he can cash a cheque.
However, pay day loans are a very expensive form of borrowing, and once you borrow from them, it is very hard to stop.
For most people the story is the same: I borrow $270 this week, and at the end of next week I pay back $315. I don’t have the $315, so next week I borrow $315, and end up having to repay $370 in two weeks. I don’t have that, so I have to borrow again.
The cycle continues until you have payday loans from three or more places, and then for many personal bankruptcy becomes the only option.
My advice is simple: if you don’t have to borrow from a pay day loan place, don’t. In most cases you would be better off asking your landlord to wait a week to get the rest of the rent, or pay your phone bill a week late, than to borrow from a pay day loan company.
If you live in Brantford and have more debts than you can handle, including payday loans, I urge you to get help. Bankruptcy may be an option, but there may be other options as well, so e-mail us or call us today in Brantford at 519-770-4440 to set up a free consultation to make a plan deal with your debts.
