Canadian households are heavily in debt. A recent update of economic indicators in Canada reveals that Canadian families now owe much more than they earn. Many families continue to look for ways to borrow to pay down their debts, leaning towards conventional and unconventional loans to achieve their objectives
The grim realities of Canadian household indebtedness are contained in Statistics Canada’s “National Balance Sheet” published in December 2017. According to the figures contained in the publication, as of Q3 2017, the Debt to Disposable income ratio stood at 173.34%. So, what does this mean? Put simply, the average Canadian household owes $1.73 for every $1 they earn. To put that figure in perspective, in Q4 of 2014 that figure was $1.65 for every dollar earned!
Individuals and families have maxed-out their credit cards, taken on 2nd and even 3rd mortgages on their homes, and tapped personal loans to borrow and pay down debt. This high-indebtedness situation has left most Canadians with the inability to now access leading-tier credit – which includes major banks and credit unions. Many leading financial institutions consider these individuals and families a “poor credit risk”, leaving them no other choice but to look for alternate sources of financing.
While Personal Loans remain their first choice, some Canadians are turning to Pay Day Loans as an alternate. Unfortunately, borrowers are unaware of the differences and consequences of using these two sources of finance. Here’s what you should be aware of before deciding how much to borrow, and whether to take on a Personal Loan or turn to a Pay Day Loan company to meet your credit needs.
Understand Your Credit Needs
No matter what the need is, whether it is a planned necessity or to meet an emergency, there are a few important considerations that need to be kept in mind before you make a borrowing decision:
- The loan amount: What amount do you need?
- The timeline: What’s the expected timeframe for which you are borrowing – a week, a month, 6 months?
- How frequently will you be making repayments – Weekly, Monthly, Quarterly?
- What will be the size of each repayment?
- What impact will these repayments have on the rest of your finances – Will you have to borrow more to cover your other expenses; Will you need to defer other critical expenditure, like your mortgage, rent, utility bills?
With this analysis in hand, you can now appreciate which credit avenue you can safely tap into. While Personal and Pay Day Loans might accomplish the same objective – they put money into your hands when you need it; the repercussions of each mode of financing are different.
Pay Day Loans
These are ultra-short duration loans, and usually not more than a few thousand dollars in value, that cash-starved individuals can tap into. The name “Pay Day” is indicative of the short-term nature of these loans. You usually borrow them until your next pay day, when you start repaying them.
Things to be aware of when taking a Pay Day Loan:
- You must be able to prove that you have a job with a steady paycheque
- If you need less than a $1,000 to $1,500 urgently, then Pay Day Loans might be ideal for you
- The cost of a typical loan can range anywhere between $10 to $30 per $100 borrowed (more about borrowing costs later)
- These loans are best suited if you plan to repay them quickly
- Most Pay Day Loan providers expect the loan to be repaid in full when due, otherwise you could end up paying additional fees and financing costs
To put the costs of Pay Day Loans in perspective: The typical cost for a 2-week loan could be $15 for every $100 you borrow. This works out to a whopping 400% APR rate of interest! If you don’t have access to Tier 1 credit, or if you don’t have a good credit score (and need access to funds), then Pay Day Loans might be your only option.
If the costs of servicing a Pay Day Loan scare you (as they should!), then a Personal Loan might be your option of choice to gain credit. Here’s what you should know before applying for a Personal Loan:
- These loans usually come with fixed rates of interest, and defined payment schedules (usually longer than just one pay cycle)
- As in the case of Pay Day Loans, Personal Loan financiers need you to have a steady source of income
- In addition, you will need to submit to a credit check before your lender provides you the loan
- While interest rates are usually fixed, if you can’t secure your loan against some collateral (like your house or your car), then you’ll likely have to pay higher rates for such un-secured loans
Typically, if you have a good credit score (even something that’s less than perfect may be acceptable to some lenders); and if you require access to larger amounts of money ($2,000+) that you can’t repay within a week or two, then a Personal Loan might be your best bet. To keep borrowing costs low, you should consider a secured versus an un-secured Personal Loan.
Before you lock yourself into a Personal Loan, it may be a good idea to shop around first. Use a good online Personal Loan Calculator, to gauge the impact of the loan before you sign on the dotted line.
While Pay Day Loan providers are often looked upon as “predators”, the fact is that they offer a much-needed service to Canadians that don’t have access to bank-provided credit. Governments are aware of this fact and, in some cases, have brought in additional regulation to bear on these institutions.
For instance, effective Jan 1, 2018, the Ontario government has enacted regulations that have brought down the cost of borrowing from $18/$100 (in 2017) to $15/$100 in borrowed money. There will, however, be an additional $45 charge for a $300 loan. Overall though, while you would have repaid $354 for $300 borrowed in 2017, you now must repay just $345. Other Pay Day Loan regulations will also make it cheaper to borrow in Ontario come July 1, 2018.
Regardless of which source you tap though, Personal Loans or Pay Day Loans, good credit management is important. If you don’t manage your debt properly you could end up in a vicious endless cycle of borrowing-to-repay!
This information is just our view and should be not be considered advice of any sorts.
From our experience and other professionals we partner and engage with, we work to find useful tips and information that would be important to share.
If you are someone that is looking for professional advice tailored to your circumstance, please contact a bank, financial advisor, or mortgage broker.