When money troubles get really bad, it may feel tempting to consider taking out a payday loan. Before you do, be aware they're a very expensive way to borrow money. And that's not the only reason to avoid getting a payday loan. But should you have no other option, learn what’s involved in getting a payday loan, and how to prevent problems.
There are limits on payday loans
Payday loans are small, short-term loans. They are given by "payday lenders" to people who can’t borrow from traditional banks or credit unions.
How much you can borrow
Under the law in BC, the most you can borrow from a payday lender is $1,500. But depending on your income, you may be limited to a lower amount.
You can’t borrow more than 50% of the net income you receive during the term of the loan. Net income is what you earn after taxes and deductions.
For example, say you earn $3,000 per month, and $1,000 of that is taken off for taxes and other deductions. That means your net income is $2,000 per month. If you get a payday loan for a 30-day term, you can borrow up to $1,000, which is 50% of your net income over the term of the loan.
How much the lender can charge
Under the law in BC, the most a payday lender can charge you for a loan is 15% of the principal amount. This includes interest and any other fees.
This is a very expensive way to borrow money. If you take out a $300 payday loan, that 15% charge will be $45. If your loan is for 14 days, this translates into an annual percentage rate of interest of 391%. This is roughly 20 times as expensive as using a credit card, and 50 times as expensive as borrowing from a line of credit. (Learn more about the cost of payday loans in our page on why you should avoid payday loans.)
Payday lenders charge you for the convenience of quick access to cash. If you need money for a short period of time, consider applying for a credit card or line of credit instead of a payday loan. See “Prevent problems”, below.
How payday loans work
When you take out a payday loan, you promise to repay the loan when you get your next paycheque or other regular income.
If you are paying by cheque, you sign the cheque and date it for the day you expect to have money in your bank account. The payday lender will cash the cheque on that date.
You may be asked to pay by pre-authorized debit. If so, the lender takes the money directly from your account on the date you agreed on.
Usually, you have 14 to 28 days to repay a payday loan. You may get as long as 62 days. (But never more than that.)
Payday loans are easier to qualify for than traditional loans. Payday lenders do not ask to see your credit report before lending to you. Usually, they ask for:
- proof that you’ve been employed for three months in a row
- proof of your address
- your chequing account details
Payday lenders must be licensed
Many payday lenders have offices in strip malls or other storefront locations. Some offer their services over the internet. They often have the words “money” or “cash” in their names.
Under the law in BC, payday lenders must have a licence to operate for each of their locations. Each licence must be displayed in the location that it relates to.
Each location must also have a sign telling customers:
- the lender’s total charge for a payday loan
- the lender’s total charge for a $300 loan for 14 days
- the annual percentage rate of interest the lender charges for a $300 loan for 14 days
A payday lender who operates online must provide this information at the top of their homepage. Their licence number must be displayed there also.
A payday lender who operates by telephone must provide you with this information, including their licence number, before you apply for a loan.
On the Consumer Protection BC website, you can look up licences of payday lenders. You can search by the lender's business name or city. If you’re dealing with an online lender, check the lender’s website to make sure its license is properly displayed at the top of their homepage.
What must be in a payday loan agreement
Under the law in BC, the terms of a payday loan must be included in a written loan agreement. Before you sign the agreement, the lender must tell you:
- the full cost of the loan
- the interest rate of the loan
- how to cancel the loan
The loan agreement must tell you:
- how much money you will receive
- how much you have to repay
- when you will have to repay
- that you can cancel the loan during a two-day “cooling-off period”
The loan agreement must be clear and easy to understand. The agreement must be signed and dated by you. The lender must give you a copy of the signed agreement at the time you sign it.
Payday loan agreements must inform you that you can contact Consumer Protection BC for help. Contact them if you’re unsure about any payday loan requirements.
What payday lenders are not allowed to do
“My landlord said he would evict me unless I paid to fix a window I broke. I was between jobs, so I took out a payday loan. Then my car got totalled. I desperately needed money for a new car. I went back to the payday lender. They explained they couldn’t give me more than one loan at a time. Just as well, as it would have been an expensive way to get a new car.”
– Norm, Whalley
Payday lenders are prohibited by law from giving you more than one loan at a time. In fact, the law in BC sets out a number of things payday lenders are not allowed to do. Other things a payday lender can’t do:
- give you a second loan to pay off the first
- advertise a prize or reward for taking out a loan
- tell you the loan will improve your credit score if it will not do so
- ask for security for the loan
- ask for someone to guarantee the loan
- charge you any amount that wasn’t in the loan agreement
- agree to sell you other goods or services in your loan agreement
- make the loan due before your next payday
- collect money directly from your employer
Some payday lenders tell borrowers they must buy "loan insurance" at an extra cost. You can choose to include insurance on your loan, but it is your decision. By law, insurance is optional. It’s okay to tell the lender that you do not want the insurance coverage.
Your rights to cancel a payday loan
Under the law in BC, you have the right to cancel a payday loan within two days of getting your first advance, without any penalty.
Say you take out a $500 payday loan on Wednesday. You have until the end of the day on Friday to notify the payday lender that you’re cancelling.
You can cancel your payday loan at any time if the payday lender:
- didn’t tell you the full cost of the loan, including the annual percentage rate of interest you will pay
- didn’t tell you about your cancellation rights
- didn’t include the required information in your loan agreement
- didn’t give you a cancellation notice form and a copy of the loan agreement at the time you signed it
- did any other act that isn’t allowed under the law
To cancel the loan, you must deliver the cancellation notice form to the lender. For the steps involved, see our page on cancelling a payday loan.
You can back out of a payday loan agreement within two days of receiving the loan. You can sometimes back out after this two-day “cooling-off period”. For details, see our page on cancelling a payday loan.
If you’re late repaying the payday loan
If you can’t repay a payday loan on time, the lender can add extra charges to your loan.
The law in BC says that a lender can charge interest at a rate of 30% per year on any amount outstanding after the loan is due.
As well, the lender can charge a one-time $20 fee for any dishonoured cheque or pre-authorized debit.
Your bank may also charge you a fee if there wasn’t enough money in your account for the payment.
If you can’t repay a payday loan
If you don’t repay a payday loan, it will show up in your credit report. This can make it more difficult for you to get a loan, rent an apartment or find a job. See our guidance on taking charge of your credit report.
The lender may decide to sue you in the Civil Resolution Tribunal (if the amount is less than $5,000) or Small Claims Court (if the amount is between $5,001 and $35,000.) If the lawsuit is successful, the lender may be able to take some of your money or other property.
If you know you won’t be able to pay off the loan when it’s due, discuss this with your lender. You may be able to work out a new payment plan. However, the lender can’t give you a new loan to pay off the existing loan.
Step 1. Don’t get a payday loan
Before taking out a payday loan, look at other options. Payday lenders charge much higher interest rates and fees than banks, credit unions and credit cards. And that's not the only reason to avoid getting a payday loan.
A credit card is a better option
One of the best options if you need money right now is a new credit card. Most major banks offer promotional rates for the initial month or two. Paying down your credit before the promotional period ends is a good approach to save money and build your credit score.
If you have bad credit, one option is taking out a secured credit card. Many major banks offer secured credit cards to higher-risk borrowers. The approval process for these cards is much less strict. However, the issuer usually requires a cash deposit as a guarantee of on-time payment.
A line of credit is another good option
Consider opening a small ($10,000 or so) line of credit when you don’t need it and have good credit. (If your credit rating takes a hit later on and you need money, you may not qualify for a line of credit.) Open it, but don’t use it. This will allow you a “safety net” you can use instead of taking out a high-interest credit card or payday loan.
Step 2. Really ... don’t get a payday loan
We mean it. If you have any other option, don’t use payday loans.
If you’ve already taken out a payday loan, you may have the right to cancel it. You can always do so within two days of taking out the loan. You may even be able to cancel the loan outside of the two-day cooling-off period if the lender didn’t cross their t’s and dot their i’s. See our page on cancelling a payday loan.
Step 3. Shop around before you sign anything
If you truly have no option other than taking out a payday loan, shop around to a few payday lenders. Spend some time researching the reputation of payday lenders before choosing one.
- Search the web for any user reviews of the business.
- Check to make sure that the lender is licensed.
- Find out if there have been any enforcement actions against the business.
Visit a few different lenders to compare their rates. Under the law in BC, payday lenders must display a sign at each of their locations setting out certain information. See above, under “Understand your legal rights”, for details.
Step 4. Make sure the payday lender plays by the rules
Before getting a loan, bone up on what payday lenders can and can’t do. In BC, there are laws that say what payday lenders aren’t allowed to do. As well, the law sets out what must be included in every payday loan agreement. See “Understand your legal rights”, above.
Make sure the lender gives you a signed copy of the agreement and a cancellation notice form.
If you want to confirm that a payday lender has complied with the law, contact Consumer Protection BC.
There are steps you can take if you’re getting annoying phone calls from a payday lender you owe money to. Under the law in BC, you have the right to request that the lender communicate with you only in writing. All you need to do is ask the lender, and give them your mailing address.
Can I take out another payday loan to repay my current loan?
No. Not from the same lender at least. The law in BC says that payday lenders aren’t allowed to grant "rollovers". A rollover is where a lender gives you a new loan to pay off an existing loan.
Can a payday lender charge a fee if I repay a loan before it’s due?
No. You can repay the payday lender any time before the loan is due. Lenders aren’t allowed to charge you a penalty for paying early. If you’re charged a fee for paying early, you can get a refund for that amount.
Can I get a payday loan online?
Yes. If you want to take out a payday loan online, make sure the lender is licensed in BC. The licence number must be displayed on the homepage of the lender’s website. It also must be in a location on the site before you fill out any application. Do a quick internet search to make sure the lender has a valid address and provides contact information.
The internet makes it easy for consumers to share reviews of products or services. See if you can find consumer reviews for the payday lender you’re thinking of using.
The Credit Counselling Society is a non-profit society that helps people manage their money and debt better.
Consumer Protection BC licenses and regulates payday lenders in BC. They can help you find out if a payday lender has a valid licence in BC.