A payday loan is a short-term, unsecured loan of $1,500 or less that must be paid back within 62 days. It is called a payday loan because typically a person who needs money borrows it with the promise to repay the next time they get paid. The borrower provides a post-dated cheque or completes a pre-authorized debit form allowing the lender to withdraw the funds from the borrower’s account on the agreed upon date.
All payday lenders operating in B.C. are required to be licensed by Consumer Protection B.C. and must follow the rules laid out in the Business Practices and Consumer Protection Act. Here are some of the important things to know:
The most a payday lender can charge you is 23 per cent of the amount borrowed. This includes all fees and interest. All payday lenders must have a poster in their office showing the rates they charge. Beware companies that require you to pay any fees up front — this is illegal. Any fees must be added into the cost of the loan and are repayable by the end of the term.
When you take out a payday loan, the lender must give you a copy of the written agreement showing all charges and explaining your cancellation rights. You must also receive a copy of the cancellation form. You have the right to cancel the loan by the end of the following day without charge. You also have the right to repay the loan at any time before the due date without being charged extra.
Payday lenders cannot loan you more than 50 per cent of your net income during the term of the loan. In addition, lenders cannot give you more than one loan at once, extend or renew a loan at an additional cost or give you a new loan to pay out an old one. These rules help ensure that borrowers do not borrow more than is reasonable to pay back.
Think carefully before taking out a payday loan. For example, if you are charged $23 to borrow $100 for 62 days, this is roughly equivalent to paying 135 per cent interest! Even the highest rate credit card does not charge anywhere near that much. In addition, the entire amount, plus fees and interest will come off your next cheque. If you are living on a very tight budget, you may end up borrowing more money to make up for the shortfall, resulting in a continuing debt problem.
Consider: Can you come up with the money by selling something or by cutting back on certain expenses? Can you find a less expensive way to borrow money, like from a friend or family member?
If you going to go with a payday loan, make sure to know the rules so you are protected. Shop around to see which lender offers the lowest rates. Plan ahead: How will you meet your basic expenses after the money to repay the loan comes off your next cheque?
If you have any questions or concerns about a payday loan, contact Consumer Protection BC at 1-888-564-9963.
Amy Taylor is the co-ordinator of the Kootenay Boundary Credit Clinic, a project of Castlegar & District Community Services. The Clinic provides free information and workshops about debt, credit and money management. Call 1-877-565-0013 or go to www.kbcredit.org for more information.