i) What is a Payday Loan?
A quick cash advance (also known as a
payday loan) is a short-term loan borrowed that will help
you cover your short term cash flow problems while you wait
for your paycheck at the end of the month. Payday loans
come in denominations of $100, $200, $500, $1000 or $1500.
Most payday loans available go up to a limit of $1500 in
If you borrow a payday loan, you promise
to pay it back from your next paycheck. This next paycheck
must be within 2 weeks and the total amount you can borrow
is limited to 30% of the total net amount of your paycheck.
For instance, if you earn $1200 every 2 weeks, then the
maximum amount of payday loan you can borrow is $1200 x
30% = $360.
Since payday loan companies are not regulated
by the government, they charge enormous amounts of fees
& interest charges that most people do not realize.
Payday loans are thus very expensive means of borrowing
ii) How Does a Payday Loan Work?
You go into a payday loan shop and ask
to receive some $$. They'll be like "sure!" In
order for payday loan lenders to lend you money, they will
require a few things off you:
- Proof that you have a steady job or steady
- Have a permanent residential address
- Active bank account
- Be over the age of 18
To lend you the payday loan, the lender
will ask for a post-dated check or authorization of a direct
withdrawal from your checkings/savings account of the original
principal amount that you borrow + any fees + interest charges.
The amount of fees that you will pay within this 2 week
period is what makes payday loans so expensive to borrow.
After you step into the payday loan shop
and ask for a loan, the lender will ask you to sign an agreement,
detailing the terms and conditions of the loan. Some of
the terms of the agreement will include:
The total amount of the loan and the
date it must be repaid
Any upfront fees, charges and first-time
borrower fees added to the original principal
Any other fees and charges that you
Payment options available to you (electronic
or paper check, wire transfer, etc)
- Any late fee charges
iii) How do I Repay Back a Payday Loan and When??
The official date at which you will have to
pay back the payday loan will be stated on the agreement that
you sign. This amount includes the original principal amount +
any upfront charges + first time borrower fees + interest charges.
The lender will cash in the post-dated check that you presented
to the lender when you borrowed the loan on the date of maturity.
This way, the amount of the loan will be debited from your checking/savings
account automatically by the banks.
Note: Some lenders require that you pay the loan
amount in cash. Check with your payday loan lender to see exactly
how they want to get paid.
iv) How Does a Payday Loan Affect my Credit
If you make your credit card payments on time,
this will be reflected on your credit report and you will have
a good credit score. This is because credit card companies work
in conjunction with credit report bureaus to assign you a credit
score. Therefore if you make any late payments, this will negatively
impact your credit score.
Since payday loan companies are not among the members of credit reporting agencies, any on-time payments
you make towards a payday loan does not positively reflect your
credit score. Infact, the credit reporting agency won't even know
that you have borrowed a payday loan. Note however that if you
make any late payments towards a payday loan, the lender will
report you to the credit reporting bureaus (and collection agencies)
and this could negatively impact your credit score.
Similar to credit reporting bureaus, there is
a new service called TeleTrack Canada that tracks
any payday loans you borrow, any rent-to-buy services you acquire
or any consumer finance companies that you work with (for example
credit counseling firms). Your information is then entered into
a database administered and maintained by TeleTrack Canada. Payday
loan companies have access to the database records of TeleTrack
Canada and can therefore check these records before lending you
a payday loan.