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Payday Loans – The First Step into Perpetual Debt

From the desk of Matthew Shantz:

Many years ago, during a different time in my life, I found myself facing a cash shortfall. I literally had the change in my pockets to get me through to my next pay day. Credit Cards were maxed, Bank Account was in Overdraft and my cupboards had a few boxes of pasta and my fridge some nearly expired milk. I wasn’t sure how I was going to pay my rent – living in Toronto, that rent was not cheap – let alone how I was going to keep myself fed. So, I did what everyone does in that situation, and look for a quick source of money without having to share my plights and desperation with family or friends. I was ashamed and embarrassed and did not want to share that I had gotten myself into that situation. I worked full time and had a half-decent paying job at the time, but sometimes, life has a way of getting to you. An unexpected, slightly more then manageable and definitely required, dental bill had put a wrench into my fine-tuned (a slight exaggeration) budget and threw me onto a months long financial roller coaster.
I hate Roller Coasters – especially financial ones. Hanging upside down, my last few coins clinking away in my pocket, I did what every reasonable but desperate adult would do. I walked into a sketchy building, on the corner of Yonge St. that offered “Quick & Easy Loan Approvals”. I approached the bulletproof window, with the little slot for money to be passed through and the asked the woman behind the counter for an application. She was kind enough and passed it to me and I took a seat to fill it out. Thankfully I had forgotten to bring a paystub with me. That one oversight on my part likely saved me from walking down a pathway of perpetual debt that I doubt I would have easily recovered from.

The Canadian Government website describes a payday loan as “a short-term loan with high fees that make it a very expensive way to borrow money. You can borrow up to $1,500. You must pay the loan back rom your next paycheque. You have up to 62 days to pay it back. If you can’t pay it back on time, you’ll face more fees and interest charges. This will increase your debt.”

Since then, life has changed a lot. Thanks to the nature of my work, my social media feeds are filled with financial service offerings and ads. Often, not the kind that you would want to see. I started thinking recently again about Payday loans, as people struggle with financial difficulties due to the COVID-19 crisis and the uncertainty of income, I felt now would be a good time to look into these in more detail.

The first thing I noticed when searching the websites for the different Payday Loan companies is that you need to dig deep in order to find the interest rate offers, and good luck with finding any information regarding the terms associated with these loans. Finally, after an exhausted search through the FAQ section of one of the sites, I was able to find some basic information regarding the repayment structure of the loans offered by one of these companies.

“A: In Ontario’ we charge 15% of the Principal, so for each $100 you borrow the fee is $15.” This doesn’t sound so bad. Except when you realize that they are typically going to be lending out an amount closer to $1,500 – the allowed maximum for this kind of loan. You would owe a repayment of $1,725 on your next payday.  
$225 in interest for a 2-week loan on $1,500 – this is bad, but not the worst that I have seen. What did surprise me however, was the lack of information regarding ‘Fees’ – processing fees, administrative fees, transfer fees, if you can come up with an adjective I am sure we can find a way to put the word “fee” after it. Also, there is offerings for “Re-Loaning”, if you cannot make your payment in full, you may need to ‘Re-Loan’ in order to cover this. Again, no information regarding interest rates and fees was made available regarding this.

Assume for a moment that you earn $2,000 bi-weekly, or $52,000/year. This isn’t a bad income by any means. $52,000 less Federal Taxes, Provincial Taxes, CPP/EI Premiums leaves you with a Net Income of $40,279. Let’s assume for simplicity sake that you don’t have benefits and that your employer gives you your vacation time and doesn’t pay you a subsidy instead. That means your $2,000 bi-weekly paycheque is only $1,549.19 in your pocket come payday.

So, not only do we not have enough money from our paycheque to repay the $1,725 that we owe for the previous Payday loan, we are actually short $175.81 AND have no money left over to survive the next 2 weeks on.

This is where it starts to get ugly.

Whereas finding terms and interest rates for these loans was difficult – impossible in some cases, it was VERY easy to find information on Extending, Re-advancing and Prolonging your Loan. So long as the initial loan was repaid within 62 days there was no problem, there is nothing against a new loan every 62 days. The additional funds you require to make up the shortfall, don’t worry – those can be included in the next loan as well. All of the sudden, more and more of the $1,500 you are borrowing is being directed towards repaying the shortfall that you incur each time you take out a loan, you need to keep taking out the loans because your income is not sufficient to cover a full repayment, and the cycle continues on and on, paycheque after paycheque, until you are left working just to cover the shortfalls you owe the lender. Eventually you will find yourself taking out the loan just in order to repay it and you have dug a hole so deep, escape is essentially impossible.

Everyday I am grateful that I never brought that paystub to the Payday Loan Office. On the way home to get the necessary documents, I had a real moment of introspection. Thankfully, I humbled myself, pushed down my pride, and asked an Ex for assistance (talk about an embarrassing conversation). I was fortunate enough that with a little help, I was able to get out of that rough patch relatively quickly and did not embark on the downward spiral into an almost unescapable pit of financial dependency and ruin.

Years later, I realized that there are better options available. Not meaning friends, family (or Exes), but actual tools that can be leveraged to help in these situations. Before running into the Payday Loan Office, it is important to reach out to experts and professionals in order to see if there may be options that you hadn’t considered yet. Don’t settle for “Quick & Easy”, because I can promise you, there is no such thing.

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