in Opinion, Pay Cheques, Payday Loans

I note that the pay-day loan places are now changing their names to sound much more friendly, and most of them are using names that would portray them as a “Money Store“, and I guess there is a ring of truth in that description since you are going to there to buy money.

Are you going to get money on a discount? No, that won’t happen. Will there be a “sale on money” and you’ll get it for cheaper, maybe, sometimes, but you are still buying money there, but not at a very good rate.

How Much Money Am I Buying?

If you ask the Pay Day Loan Association (and according to this 2006 CBC posting), typically you are buying about $300 now and you’ll pay it back in about 10 days or so, once your pay shows up. At the end of those 10 days or so, you can expect to pay about $363 dollars (maybe less, possibly even more, but I haven’t stepped into one of these establishments so I couldn’t say for sure). Remember even with the new Payday Loans Act in Ontario, you can still be charged $21 service charge for each $100 you borrow (so if you borrow $300 you could get hit with a $63 fee). That doesn’t seem to bad, does it?

You have bought $300 now, for about $365 in 10 days, but maybe you needed that money to pay your rent, so it does have some value I suppose. You have now paid somewhere more than 500% interest annually (not compounded) to buy this money for a short-term loan (but wait that’s 21% only, no, you paid it back in 10 days, 1/36th of a year, if you look at that over the whole year that’s a lot more). I am sure other financial bloggers could give you the exact tally, suffice it to say it is astronomical over the year.

Yes, but it really only cost $63 so that isn’t that much, is it? Think about that statement, you just borrowed $300 because you didn’t have enough money before your pay arrived, and now you have started your next pay period $63 in the hole, what are the chances you get another pay-day loan soon? I would say pretty high, but that is only my opinion.

Have a look at the Capping Borrowing Costs report from February 2009, it is quite enlightening what is still allowed in this modern day usury program. My comment about getting another loan quickly is actually not as flippant as I thought, and I quote:

The Canadian payday lending industry depends heavily on repeat business. For every loan to a new customer, payday lenders make 15 loans to repeat customers on average across the country.5 As a result, even the largest stores have fewer than 1,500 different customers in a year, with a typical number of customers ranging from 200 to 500. A consumer survey6 indicates that almost half of Toronto’s payday loan borrowers have taken out six or more payday loans in the last 12 months.

So once you are in this financial trap, it is not easy to extricate yourself.

Admittedly the loan company is taking on quite a risk, but they are paid very handsomely for that risk, and given the number of storefront pay day loan “stores” opening in my area, it must pay well enough.

I realize it is easy for me to comment on how this isn’t something you should ever use, as a financial service, but I do realize sometimes folks end up in dire financial predicaments, but this should not even be your last choice, because as the report points out, once you start using this service, it is a lot harder to stop using this service.

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