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The Bank of Canada has just corrected their statistics on Canadians debt ratio from 150% (estimated in the summer 2012) to be now 162% – which is just about where the United States was right before their economy collapsed.  Does this sound alarming to you?  With Canadians so deeply indebted, it’s no wonder Payday loan and Money Mart shops are popping up everywhere preying on the cash desperate.

Payday loans are easily accessible to consumers who need immediate cash.  A payday loan is a small cash loan given to an individual based on the fact that the loan is expected to be repaid with their next paycheck.  It’s basically like getting part of your next pay cheque early. The repayment period is based on how frequently you get paid.

To apply for a payday loan you need to show the following:

  1. Your last pay stub
  2. Your most up-to-date bank statement
  3.  A blank personal cheque

So why are Payday loans so dangerous?  Quite simply, the hefty interest rate on loans is unconscionable.  The provincial government set a maximum total cost of borrowing cap for payday loan agreements in Ontario to be $15 – $21 per $100 borrowed, as recommended by Ontario’s Maximum Total Cost of Borrowing Advisory Board.  So if a person took a $100 2-week payday loan with a $21interest charge, they would have to pay back by their next pay cheque a total of $121.  This means the Annual Percentage Rate (APR) is a whopping 500%.  Compared to the usual 28% APR of the major credit cards, does a 500% APR sound reasonable to you?

Borrowing money at triple-digit interest rates is never the right solution for people who are already in debt. Instead, payday loans make problems worse.  A payday loan requires a person to pay back their loan in full as soon as they get their next pay cheque. Given that this will take up the bulk of their pay the person is likely going to find him/her short of money before they get their next pay cheque. This can lead to a situation where the person needs to take out another payday loan in order to tide them over. Canadian statistics show virtually that anyone who has taken a payday loan will take another, and then another.  This kind of behavior is similar to an addiction.  As a consequence, people end up spending thousands of dollars a year in fees on their payday loans. This is a real problem and it is why a lot of people think payday loans are predatory loans.  Clearly, this is not a legitimate loan product that benefits consumers.

Another consequence to taking out payday loans is the priority these loans receive in a person’s total debt load.   The original debt problems that brought them to the payday lender often cannot be resolved because of the added loan debt.  This will not only further damage their credit score, it will ultimately sink further into debt by taking out payday loans.

So why do payday lenders get away with charging such high interest rates?  Payday lenders claim they are the only option for debt-strapped consumers, which is why the provincial government allows them to operate.   Canadians who are unable to secure loans from banks and are very indebted should be allowed to pursue another source for the money they need – at their peril.  If you find yourself having difficulty finding the money to pay your bills, mortgage, or rent, avoid the risk associated with payday loans.  Do not sink further into debt with the high interest rate charges from a payday loan.  Tackle your debt head on by consulting a professional and reputable debt relief company.  Call OCCA Consumer Debt Relief toll free 1-855-873-6222 or visit our website for more information on consumer debt help or payday loans www.occa.ca

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