Payday Loans and Their Respective Regulations
At some point in your life, you have probably seen a payday loan store while cruising around your city or town. So… what’s that all about anyway? A payday loan is short term financing designed to help out desperate individuals in need of fast cash for an emergency. Payday loans are useful in some situations, although, they can also do a lot of harm if you’re not cautious.
If you're considering a payday loan to aide a troubling financial situation, knowing the payday loan regulations in your region is a must. Payday loans are a unique niche of the financing industry that comes with special legislation. If you want to learn more about payday loans and the applicable regulations in Canada, continue reading below.
What is a Payday Loan?
Payday loans are short term loans that are designed to help borrowers get out of a tight financial situation. Furthermore, the term “payday” actually refers to the loan being a supplementary pay cheque. The idea behind payday loans is to make a bridge between pay cheques when an individual needs quick cash.
Why Do Payday Loans Have a Bad Reputation?
An extra pay cheque to cover the cost of a rough financial situation sounds amazing, what could possibly go wrong?! The reality is many lenders that offer payday loans do not have their borrower’s best interests in mind. Typically, payday loans have extremely short repayment periods with exorbitant fees and interest rates. If you don’t repay the loan in the ridiculously short repayment period, you will quickly accumulate other costs on top of the principal. For this reason, payday loans are often a band aid solution to a troublesome debt problem. In fact, many payday lenders prey on desperate people looking for quick cash to handle a financial crisis.
It is important to note that payday loans can be useful for some individuals depending on their unique financial situation. If you decide to proceed with a payday loan, be sure to fully understand all of the terms and conditions before signing anything to avoid getting nabbed by unsuspected, large fees and interest rates.
Payday Loan Regulations by Province and Territory
In Canada, payday loans are available to borrowers nationwide. Given the nature of payday loans, regulations have been devised in most provinces and territories, with the exception of Newfoundland and Labrador, Yukon, Nunavut and the Northwest Territories.
The legislation is meant to protect borrowers from the harsh practices of payday lenders. A big part of the legislation is setting maximum amounts payday lenders can charge borrowers for the financing. Let’s explore all of the Canadian payday loan regulations below.
Alberta Maximum Amount: $15 per $100
Prince Edward Island Maximum Amount: $25 per $100 borrowed for a two week period
Ontario Maximum Amount: $15 per $100
Nova Scotia Maximum Amount: $25 per $100
Quebec Maximum Amount: 35% annual interest limit on all payday loans
British Columbia Maximum Amount: $17 per $100
In British Columbia there are some additional restrictions. One loan per borrower is allowed at any one time. A borrower can cancel a payday loan up to the end of the following day without charge. A payday lender cannot access the borrower’s bank account or employer. Finally, the borrowing limit is restricted to half of the borrower’s regular pay cheque.
Saskatchewan Maximum Amount: 23% of owed amount limit or 30% of defaulted loan amount limit
Saskatchewan also has a borrowing limit of 50% of the borrower’s regular pay cheque.
Manitoba Maximum Amount: $17 per $100 for a period of two weeks
If an additional loan is taken out in Manitoba, the interest rate is limited to 5% or lower.
New Brunswick Maximum Amount: $15 per $100
A borrower can cancel their loan free of charge within 48 hours of securing the financing in New Brunswick. The total loan amount is limited to 30% of the borrower’s pay cheque. Lastly, lenders are limited by how many loans one individual can have.
Other Regulations to Consider
In most provinces, the annual percentage rate, APR for short, is restricted. Without these restrictions, lenders can charge whatever they’d like on payday loans. In fact, this can happen in provinces and territories that do not have payday loan legislation. Regardless of whether your region has legislation, it is important to know the total loan cost before borrowing money.
Unfortunately, most Canadian payday loan regulations do not provide guidance on fees. This means that there could be hidden fees in your payday loan agreement that are perfectly legal. Read over the contract before signing to ensure you don’t get dinged by these kinds of fees.
Payday loans are designed to hold off your finances until your next payday. For this reason, legislation related to payday loans tend to outline limitations on loan amounts. The limitations are designed around how much you earn from your job. Finally, the legislation doesn’t say much about the duration of the loan. Be sure that you can afford to repay the loan at the end of the term.
Alternatives to Payday Loans
Payday loans have their place in the world of finance, but generally speaking, it is best to avoid them entirely. On the bright side, you have ample other options to turn to if you’re considering a payday loan. Below are some alternatives to payday loans.
- Negotiate a payment plan with lenders if you know you’ll be late or partial with payment
- Improve your credit score and report to get approved with more legitimate lenders
- Obtain an unsecured personal loan from a bank, credit union or online lender
- Have a backup credit card handy for emergencies
- Create a cash fund for emergencies
- Get a second job or ask for a raise at your current job to earn some extra cash
Final Thoughts
Payday loans can be helpful in some situations, so long as you know what you’re getting yourself into. Furthermore, if you are considering a payday loan, it helps to understand the regulations impacting the payday lending niche. You can also do some additional research on the specifics of your region’s payday loan restrictions. If you decide that a payday loan isn’t for you, you have many flexible options at your disposal. Either way, consider your current situation and financial goals for the most optimal results!
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Author Bio
Mohamed Konate is a personal finance expert, blogger, and marketing consultant based in Toronto. He is a former financial services professional who worked at major Canadian financial institutions for many years. He managed the marketing strategy around various financial products ranging from credit cards to lines of credit. Mohamed is passionate about personal finance and holds a Bachelor's in Business Administration from the University of Quebec (Montreal) and a Master's in International Business from the University of Sherbrooke (Quebec). He is also the author of the Canadian Credit Card Guidebook.