How to break the payday loan cycle

By: Dominic Licorish on November 14, 2016
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Many of us have been there. Maybe life threw you a curveball or you made some ill-advised spending decisions. Whatever the cause, you’re out of cash and you need to pay the hydro bill, get groceries, and come up with rent. So who do you turn to for quick cash?

If you’re lucky, friends or family may be able to help you out of a bind, but a lot of people (myself included) would be plenty embarrassed to rely on someone else for a loan. Enter the payday loan business. Payday loans, also called cash advances, differ from other kinds of loans in some very important ways. While borrowing money in general can be financially risky, payday loans are some of the absolute worst ways to do it out there. Here’s why.

How payday loans work

Payday loans are short-term loans of up to $1,500. They’re one of the easiest loans a person can qualify for and are designed to provide quick cash. They get their name from the fact that the money is borrowed against your next paycheque and will typically be automatically debited from your account on your pay day.

However, the convenience comes with a steep price. Fees differ by province, but interest on payday loans typically comes up to $21 per $100 borrowed. According to the Financial Consumer Agency of Canada, that interest rate works out to a ridiculous 546% yearly rate. When compared to the typical 20% yearly rate of most credit cards, you can see exactly how much more expensive payday loans are.

The vicious cycle of payday loans

People get trapped in the payday loan cycle when they find themselves relying on payday loans to cover ongoing costs like groceries or bills. It’s a cycle people fall into when paying back a previous payday loan leaves them without enough money to cover the costs of the next two weeks. So they take out another loan, and then a few weeks later, another.

It’s a costly trap to fall into and getting yourself out of such a situation may seem impossible at first. However, there are ways to break the cycle.

Break the cycle

The main challenge with payday loan cycles is time. It’s one thing to pay back $400 over the course of a few months. However, it’s much harder when you have to pay it back in 2 or 3 weeks and have no chance to save up. At the end of the day, the best way to break the payday loan cycle is to bite the bullet and force yourself to live off whatever you have left in your account.

This means making sacrifices for a few weeks and getting very creative about saving money. If you’re not confident that you can live off of a reduced paycheque, you can try to lighten your load by taking progressively smaller payday loans until you can afford not to. It’s like the Nicorette of taking loans.

Alternatively, if you’ve just paid back a payday loan and can’t make it to your next paycheque on what’s left, you can cover extra expenses with a credit card. While this isn’t an ideal solution, it is a slightly better way to borrow thanks to the lower interest rates on credit cards. Whether you use your card for a cash advance or to make a few purchases, it is harder to get stuck in a loan cycle with credit cards, but the danger is still there, especially if you only make the minimum payments.

Avoiding borrowing money can be tough, especially in a society where it’s so easy to feel like everyone’s having more fun than you are. But living within your means comes with its own rewards. Make a realistic budget and build an emergency fund to keep yourself from using payday loans in the first place. While possible, it’s not an easy cycle to break.