Why a payday loan can make money problems worse

By Maya F. Wright Last updated Jul 6, 2021

I work in construction and a few months ago when the second wave started I was missing my child support. A buddy from my crew suggested a payday loan. It brought me the money I needed, but I didn’t know it was going to turn into a huge debt. After getting the loan, I couldn’t afford my rent for the next month, so I got another loan. My truck was supposed to be confiscated so I took out some loans online because my credit rating means I can’t get any money from my bank. Now I owe more money on all of these loans and the credit cards that I maxed out before than I earn. I have no idea how to make all the payments and the pressure is killing me. How do I get out of this huge mess? ~ Damon

A:

The pandemic has hit us all very hard in many ways, and in the face of the pressure, it can be difficult to step back and make thoughtful decisions. Unfortunately, when it comes to our money, the long-term consequences of expensive decisions can be hardship.

A

current survey

from the Credit Counseling Society shows that one in four Canadians is concerned about their current financial situation. However, turning to costly short-term loans ultimately does little to alleviate anxiety. Think of it this way: If you are short of cash now and have no savings to hand, how can you repay the short-term loan plus interest and fees and still live with the remaining money? ? As many have found out, the answer is “you don’t”. You pay off the loan with the money you have, but take out a new loan to get through until your next paycheck.

A payday loan, whether in person or online, can seem like an easy way to bridge a shortfall from one paycheck to the next, especially if you’ve run out of traditional loans like credit cards, a line of credit, or an overdraft. But the reality is that most people find out the hard way that they accidentally got stuck in a debt cycle that is difficult to escape.

The longer you ignore debt, the worse it gets

If you’re used to using an available credit card on a cash advance to cover a daycare or rent, or clicking an app to get instant online credit to cover regular living expenses (e.g. it’s hard to imagine how You will survive without those lifelines, but if you ignore your debt, it will get worse, not better.

Our survey

also found that more than a third (36 percent) of Canadians would not seek professional financial advice until their debt reached uncomfortable levels. The truth is that those who get in touch earlier tend to have more options. And having a plan, even a difficult one, is better than wondering when the other shoe is going to fall.

Nobody can argue with the convenience of an instant loan, and regaining control of your finances can feel like a daunting task. But honestly ask yourself what your future will be if you do nothing. How are you going to deal with all the stress and pressure?

Alternatives to expensive loans for people with poor credit ratings

Learn how to escape the payday loan cycle

In order to break out of the payday loan cycle, you need to know what owed you in the first place. Think about your circumstances and consider:

● Was there an emergency expense that wiped your savings account and you didn’t have a chance to rebuild it before facing the next money crisis?

● Has your income decreased?

● Have your expenses increased?

● Where do you stand with your budget? Do you have one?

● Are there any non-financial factors that have contributed to your situation?

● Do you have debts that you should have settled sooner?

Once you know why you were looking for payday loans, there are steps you can take to avoid relying on them again to make ends meet.

Check your budget

Check out next

Your Büdget

. The best way to deal with your debt depends a lot on where it is. If you’re on a budget, now is the time to create one. When you know how much all your expenses are, including some savings on expenses that are incurred regularly throughout the year, subtract them from your income – how much is left? If you have some money left, your options are other than having your entire paycheck requested.

Open a new bank account bank

Next, you should keep your paychecks safe. Maybe you have to

open a bank account

with a financial institution that you do not owe any money to. When you agreed to the payday loans, you also gave them permission to take payments from your bank account. While you are working to clarify your situation, it is important to keep your cash safe. The same goes for the other debts that you are in arrears; Your money could be set off against a debt once your paycheck is on deposit.

Develop a payment plan

If you still have money in your budget,

propose a payment plan

to your payday loan lender or company. Even though they may not agree, staying in regular communication with them and making small, consistent payments goes a long way.

If you don’t have money to make payments,

Get help

before your situation worsens. The last thing you want is for your wages to be seized and child benefit withdrawn at the source. There’s no shame in asking for help when you need it. Just make sure it’s available reliably and for free or at a low cost. Expert advice will go a long way in engaging your creditors as you work to get rid of all of your debts.

Assess yourself for the warning signs of debt

Create your own safety net

As you outline your budget, make sure you set aside a small amount to open an emergency savings account. You may feel that the money could be better used to pay off debt, but some savings will actually help keep you debt free. It seems so counter-intuitive, however

Saving is really a superpower

. Call it Plan B, a safety net, or just an emergency account. With a little money to fall back on, you won’t have to take out new credit on your next money crisis. Start small and work your way up. You will be surprised how quickly that adds up.

Check your own credit report

There is no consensus across Canada on whether or not payday lenders share information about their track record with the credit bureaus. Many of the largest companies will report your information, and some of the smaller ones won’t report unless you have a default value. The best way to find out what’s on your credit report is to

Get a copy of your own report for free

.

A copy of your credit report is also a great way to see where you stand on your other debts. While taking care of your payday loans may be your top priority, regaining control of your paychecks will allow you to add all of your debts to your payment plans.

When it comes to bad credit, the bigger question isn’t whether your credit is getting worse, but are you making any progress towards getting back on track financially? It is

There is no point in worrying about your creditworthiness

; do whatever you can to get back on track, balance your expenses with your income, settle all of your debts (not just the payday loans), and your evaluation will take care of itself in time.

Protection for consumers

Most provinces in Canada have laws that set the maximum fees a payday lender can charge, how often loans can be renewed, and what remedies they must offer customers who cannot afford to pay back their loan. Review what lenders doing business in your province are required to adhere to

the consumer protection office of your state

. Just be aware that no legislation can protect the consumer from himself. While payday lenders are required to disclose to their customers the cost of taking out the loan, someone desperate to cope with a money squeeze will not focus on the cost of borrowing. For them, the only thing that counts is receiving the money.

The bottom line on payday loans and quick, easy cash

The convenience of instant cash and easy payday loans can feel like the help you need to manage your finances. But there is never a quick and easy solution to debt. Get help sooner or later because it is always a good time to stop relying on an expensive, temporary solution to a more serious underlying problem.