John Oliver delivered a legendary segment educating viewers on the dangers of payday loans and the ridiculous draw consumers have towards them despite the fact. Oliver described the “Payday Loan” business model as a “circle of misery” designed to keep people coming back for ludicrous high-interest loans again and again.
What is a Payday Loan?
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 pay cheque. It’s basically like getting part of your next pay cheque early. The repayment period is based on how frequently you get paid.
The problem with Payday loans is the interest tacked on to the loan. 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, a 500% APR is ridiculous.
So why do people keep taking out Payday loans?
Companies that offer cash loans and payday loans have an enormous impact on North American culture. Consumers who are desperate for quick cash solutions are too easily swayed by the smooth talking advertisements for short term loans from payday loan companies. The idea of solving a short term financial problem with a loan of $300 with no credit checks seems sensible and easy for consumers. Pay your debts fast and pay it back with your next pay cheque. The reality is, most people who take out Payday loans can’t afford to pay the full amount back when it’s due and have to take another loan out to pay back the first one with interest, and hence, the “circle of misery” begins.
Some people sell off possessions in order to source the cash needed to repay a Payday loan – something they could have done BEFORE taking out a Payday loan. At least that way they wouldn’t need to worry about any interest!
In the United States, there are more quick cash loan companies and Payday Loan companies than there are McDonald’s restaurants. Shocking isn’t it? Canada has its share of these companies but provincial regulations have slowed their growth. Some Payday loan companies have had licenses revoked in Ontario and P.E.I. due to violation of the Payday Loans Act which limits the fees that can be charged.
Although the Oliver segment pertains to an American audience, the message still rings true for many Canadians who are being taken advantage of by quick cash and payday loan companies across our great country. If you haven’t watched the segment, click “Predatory Lending” on this link: http://www.youtube.com/user/LastWeekTonight
What can we do about Payday Loans?
Do your part and spread the word to your family, friends and colleagues – before picking up the phone to get a Payday loan, put the phone down and, like the Oliver segment says, DO ANYTHING ELSE. There are many ways to source extra cash when you need it most. To find out, visit our blog for personal finance tips and debt management solutions.
For more on the Dangers of Payday Loans, visit our website at click AVOID PAYDAY LOANS (https://www.occa.ca/debt-solutions/payday-loans).
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