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What is a payday loan? Are there risks or other options to payday loans?

What is a payday loan? Are there risks or other options to payday loans?
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Credit Counselling Canada
Consumer Measures Committee
Government of Canada

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What is a payday loan? Are there risks or other options to payday loans?
This question has an answer and 4 steps
July 18, 2018

A payday loan allows you to quickly borrow cash that you promise to repay when you get your next paycheque or other regular income payment.

The most money you can borrow in a payday loan in Ontario is $1,500. Payday lenders cannot give you more than 50% of your net monthly pay per loan. 

You have to agree to repay the loan in a short period of time, usually 14-28 days. The longest time you can get a payday loan for is 62 days, which is about 2 months.

Most lenders do not do credit checks before giving a payday loan. But, they usually ask you:

  • to prove you have been employed for 3 months in a row
  • for proof of your address, for example a utility bill
  • for your chequing account details

If the payday lender approves you for a loan, you’ll have to sign a loan agreement. In this agreement, you promise to repay all the money plus interest and fees. 

Payday lenders charge much higher interest rates and fees than banks, credit unions, or credit cards.

You cannot get a new loan until your first one is paid off.

Usually payday loans have to be paid back all at once, at the end of the term of the loan. But if the loan you're applying for is your third one or more within a 63‑day period, the lender must offer you an extended payment plan.

It’s important that you understand how payday loans work before you sign a loan agreement. This includes things like:
  • the amount you are borrowing
  • how much you need to repay
  • how many days you have to repay the loan
  • how you repay the loan
  • whether you can cancel the loan agreement

Before you take a payday loan, think about other ways to solve your money problems.

For example, you can talk to a non-profit credit counsellor to make a plan for paying your debts. Or, if you need money for a short period of time, using a credit card can cost less than a payday loan.

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