The Pros and Cons of High Interest Loans

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After losing my income due to an injury, I turned to high interest loans to help me pay the bills.  This leads me to the only pros I can think of.

Pro #1 Avoid NSF charges: Paying $5 in interest is much better than paying a $35 to $50 NSF (Non Sufficient Funds) charge, especially if this is a recurring problem.  But if you pay off your debt within a couple of days, your interest may even be zero.

Pro #2 The process is quick and easy: Because high interest (aka payday) loans are fairly easy to get, even for people with a poor credit rating; approval can take mere minutes and the hassle is minimal.  

Pro #3 The relationships.  Many of the staff at payday loan companies have phenomenal people skills.  They are very understanding and compassionate.  When you require multiple payday loans, you build a positive relationship with the staff.  

Now into the Cons

Con #1 High interest: 59.9% is the legal interest rate in Canada BUT does not apply to payday loans that can run as high as 400%.  Using the Rule of 72, a 36% rate will double a debt every two years, 72% rate = every year, and at 400%, that debt will double every 66 days.  Imagine borrowing $1000 and if you don’t pay it down, having that $1000 debt multiply to $32,000 in less than a year.  Compound interest sucks when it works against you.

Con #2 The process is quick and easy: This makes the option to get these loans for non-emergency purposes tempting, especially for people who don’t understand the dangers of compound interest.  We see this all the time with credit card debt.

Con #3 Extra costs: On top of the amount you borrow, some companies add on administrative fees or debt insurance.  A 10% admin fee on a $1000 debt would be $100 which would defeat the purpose of getting the loan to prevent a NSF charge.  As an insurance agent, I support insurance but not when that insurance costs 2-10 times more than a standard policy.  If you’re offered insurance on your high interest loan, just say no.

Con #4 Hard credit checks: Each time you take out a payday loan, a hard check is performed which negatively affects your credit rating.  Even though the effect is small, multiple checks over a period of time can impact your ability to get a lower interest rate in the future.

Now for some general knowledge that is neither a pro nor a con.

#1 Needing a payday loan is a sign of a bigger problem.  Poor spending habits, poor savings habits, not being properly insured or prepared for emergencies; these are all situations that can lead a person to use payday lenders.  Meeting with a financial professional, not one from the bank whose sole job is to make the bank more money, but a broker who puts your needs above commissions, these individuals will help you get ahead short-term and educate you to long-term solutions; a service payday lenders don’t provide.

#2 High interest lenders target the most vulnerable.  The reason this isn’t a con is because without payday lenders, these people would have no other options except for bankruptcy or consumer proposal.  For some reason, banks don’t offer relief to individuals with a poor credit rating who are struggling with debt.  They are considered too high risk and more likely to default on their loans.  This is why payday lenders can charge so much.  They’re taking on the riskiest borrowers who just happen to be the most vulnerable in our population, including people with disabilities, new immigrants, and indigenous people.  

#3 The amount you’re allowed to borrow depends on your income.  If your only income is the Canada Child Benefit, some lenders will allow you to borrow up to $1000.  That’s more than half your income.  If you’re struggling to pay your bills already, how likely are you to pay off a high interest debt on top of that without needing to borrow more?

If you would like help to get out of the payday lending loop, please contact me, Tina MIchelle Moller.

The opinions expressed in this blog are my own and do not reflect WFG or any other organization. I also claim any errors made as my own. To offer corrections or feedback, please contact me. Sincerely, Tina Michelle Moller