The Vicious Cycle of Payday Loans

  • By Jillian Taylor-Mancusi, LIT

What is a Payday Loan?

According to the Oxford Dictionary, a payday loan is “a relatively small amount of money, loaned at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck.”

Who Uses Payday Loans?

Let’s look at why most people need a payday loan to begin with. Generally, if you are looking for a small amount of cash and fast, it is for an unplanned emergency. The keywords here are unplanned or unexpected and emergency – something that needs to be dealt with NOW. Unless you have an emergency fund already set aside, an unplanned emergency can leave you scrambling.

How Do You Qualify for a Payday Loan?

Most people can qualify for a payday loan since the criteria is really very simple. The Consumer Financial Protection Bureau lists the criteria as the following:
— the borrower must have an active checking account;
— provide some proof of income; have valid identification; and
— be at least 18 years of age.
Since the qualifying is relatively easy, the unplanned emergency has now been taken care of; at least until next payday.

What is the Cost of a Payday Loan?

Most payday loans are for a maximum of $1,500.00. The loan comes with associated fees, which can be very high. These fees can work out to the equivalent of an interest rate in excess of 500%. Should you not repay the loan by the due date these fees will grow and will also have interest applied. Should you happen to write an NSF cheque when making your repayment, there are even more additional fees.

Are Payday Loans Regulated?

In Manitoba, as well as a few other provinces, the government has placed regulations on the payday loan industry. In Manitoba, you have up to 62 days to pay back the loan as opposed to two weeks or your next payday. Further, the maximum cost for borrowing has been limited to $17.00 for every $100.00 borrowed. There is also a “cooling off” period for 48 hours, excluding Sundays and holidays. In addition, the maximum fee for an NSF is now $20.00.

How Does a Payday Loan Become a Vicious Cycle?

Even with safeguards in place by the Manitoba government, payday loans can still become a vicious cycle of accumulating debt. If you take out a payday loan, it is because you don’t have the money available to pay for that unplanned emergency. What is going to happen to increase the funds you have coming in between the time you borrow the money and your next payday?
In reality, likely nothing is going to change — other than the fact that you now have additional debt, plus the high fees associated with that debt. What is more likely to happen is that you will have to take out another payday loan in order to pay for the first payday loan. Then in two weeks, you will have to take out a third payday loan to pay for the second payday loan and so on and so on and so on. That is the vicious cycle of payday loans.

How Can You Break That Cycle?

Breaking the cycle will be very difficult. It is best to start with the basic beginnings of budgeting, knowing where your money is going. Sit down and realistically keep track of what you need to spend money on from each pay cheque. Keep track of needs versus wants.

For example, you need to pay your rent, you need to pay your phone bill and you need groceries. You may want to go for coffee with friends, you may want to wash your car, you may want to buy steak – but do you need to? Look at your needs versus your wants and see what you can do without for the next few pay periods in order to try and save the funds to pay back that payday loan.

Another thing you can do, besides cutting costs, is increasing your income. Are there some jobs you can easily pick up in order to earn extra cash? Can you babysit your sister’s cat, pick up extra shifts at work (remember that extra work leads to extra tax so make sure tax is being taken off!), etc. You may find that you don’t really need those ‘wants’ and you really enjoy looking after cats that you can return at the end of the day. If that is the case, once the short term, payday loan is repaid, those extra funds can then be put into an Emergency Fund for the future.

What is an Emergency Fund?

When looking into setting up an emergency fund you should aim to put aside 3-6 months’ worth of living expenses. Yes, this is a large amount of money. Remember this is a goal to work towards. When you think about it, 3-6 months’ worth of living expenses is what you would need if you were to lose your job, break your leg, etc. and not be able to work. It will take you that long to recover financially. If you had an emergency fund, even if it was only a few dollars, that could pay for that unplanned emergency that led you to the payday loan company to begin with.

What Can I Do If I’m Already Deep into the Payday Loan Cycle?

If the amount you owe on payday loans is too much to be taken care of with careful budgeting and a few extra shifts at work, then it is time to see a Licensed Insolvency Trustee (LIT). These experienced professionals will review your situation, explain your options, and help you to find a way out of that vicious cycle. Remember, there are always solutions that work, even for the most extreme situations. Give us a call at LCTaylor today. There is no cost or obligation involved in getting the information you need.

Jillian Taylor-Mancusi, LIT

Jillian has worked in the insolvency field since 1992. She is a graduate of the University of Manitoba. She received her Insolvency Counselor’s Qualification Certificate from Ryerson Polytechnic University in 1998, and in 2007 she attained her license as a Licensed Insolvency Trustee. Jillian is a Read More Jillian has worked in the insolvency field since 1992. She is a graduate of the University of Manitoba. She received her Insolvency Counselor’s Qualification Certificate from Ryerson Polytechnic University in 1998, and in 2007 she attained her license as a Licensed Insolvency Trustee. Jillian is a member of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP). She is Past President of the Manitoba Association of Insolvency and Restructuring Professionals (MAIRP). Jillian has held positions on the Armstrong Point Association, Executive of her local EDA Riding Association, Manitoba Highland Dance Association, and the Continuing Education Committee of CAIRP. Previously, Jillian was the Treasurer for the Parent Association at her daughter’s school. Currently, Jillian serves as the Vice Chair for Dressage Winnipeg. Close

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