How Payday Loan Schemes Work
Payday loan stores seem to be on every street corner and all over the web these days and with good reason – they are extremely profitable. While corporate profits are a good thing, these payday loan stores market to the clientele that simply do not realize how much they are being ripped off.
How do these payday loan stores work?
From my research, most of these establishments work in this fashion:
- Client applies for a loan, provides proof of employment, income and chequing account. Loan terms are typically on a bi-weekly basis, thus the name Payday Loan.
- Once approved (usually very quick), the cash is deposited directly into the clients chequing account. Note that most of these establishments allow a maximum of a $1,500 loan.
- When the loan is expected to be repaid (usually on payday), the money plus fees and interest are automatically withdrawn from the account.
As you can see, providing that the client is employed, it is very easy to get access to cash through Payday loan stores. However, that is the end of the good news, the elephant is the room is how much do these Payday loan stores charges in interest/fees.
It turns out that the fees depend on the province of business as most of the provinces have set regulations as to the maximum amount that payday loan stores can charge.
- In Ontario, the maximum is $21 per $100 borrowed;
- In Alberta, the maximum is $23 per $100 borrowed; and,
- In Nova Scotia, the maximum is $25 per $100 borrowed.
Say Mr. Nova Scotia needed to pay his cash-only car mechanic, and was short about $500 so he decides to avail of the services of a payday loan store. While our Maritime friend may get his $500 cash in a relatively short period of time, it will cost him at least $125 for the 14 day loan. On an annual basis, that is an interest rate of 652%. Also, not only is there regular interest, but there is the possibility of late charges and/or other processing/setup fees.
While these loans can be convenient, the interest rates are pure robbery and will put the debt ridden into deeper debt. There are better solutions for emergency cash. I would typically never recommend this, but if someone is desperate for cash, it’s much cheaper (and easier) to get a cash advance from a 21% interest rate credit card via ATM. The only situation where I can see any value in a payday loan is if someone had bad credit, didn’t have any cash or credit cards, and required temporary emergency cash.