What is a Payday Loan

What is a payday loan and is it a good idea to get one?

Payday loans are short term, unsecured advances by an alternative lender to a borrower who seeks convenience and speed in obtaining his or her funds. A borrower typically needs proof of his or her employment or income, a government id, and a bank account to be granted a pay day loan. The borrower guarantees the loan by writing a post dated cheque or authorizing a direct withdrawal from his or her bank account, which includes the extremely high interest charged on the funds borrowed.

Payday loans companies typically hire workers at an hourly rate to manage a retail storefront. Payday loan companies are highly profitable because of the high rates they charge, particularly in Canada and in other countries where regulations were at one more time much more lax and less beneficial to the average customer.

Payday Loans in Canada

The payday loan industry in Canada is highly profitable and has grown significantly over the last decade. Canada’s largest payday loans company, The Cash Store, has grown by 4000% during this timeframe.  This is not surprising considering that the typical payday loan earns over 20% interest over a two-week period (the average rate is approximately $20 per $100 borrowed for a two-week loan).

Payday Loans in general

Local, Regional and National governments have begun to study the impact of payday loan companies and are creating more restrictive laws to make sure that people are not forced to pay very high interest rates simply to afford to live their daily lives. It’s clear that these companies charge insanely high rates and are probably not all that great for society as a whole.

Criticisms of payday loans

Experts, bloggers and the internet community have always looked unfavorably on the payday loan industry, As one blogger aptly put it “Another common problem that I encounter on a daily basis has to do with payday loans. While these may appear to be a quick and easy way to get money for rent, bills, credit cards, etc., the first loan is simply the start of a cycle where you are continually further and further behind on your payments and in need of even more money. Before you know what has happened, you are left in a downward spiral of overwhelming debt.”

It’s obvious that payday loans, while serving the purpose of giving loans to at times desperate people who really need it, can be very destructive since the rates they charge are so high, at times greater than even the interest rate charged on a late credit card payment. What is even worse about all of this is that most people do not even realize that they are being charged interest rates that border on usury and they only suffer the consequences once they realize just how much money they actually owe when it is all said and done. It is because of this that it is highly recommended that pay day loans are used with extreme caution and are only taken in extremely desperate times where no other option is presenting itself to you.