Taking out payday loans can lead to disastrous debt. Find out why that is and how filing a consumer proposal could be your best strategy for getting out of this common debt trap.
Getting Out of Disastrous Debt
What’s the difference between moderate debt and disastrous debt? Moderate debt is manageable. You may have to rework your monthly budget to get more savings, but as long as you maintain your payments, you should be able to whittle down your balances and reach financial stability.
Disastrous debt, on the other hand, is unmanageable. No matter how hard you try, these debts can rarely be handled. If anything, they keep growing. This is a common problem for people who have taken out payday loans.
What You Need to Know About Payday Loans
What Are Payday Loans?
A payday loan is a short-term loan offered through privately-owned companies, as it is not offered by banks. You can borrow up to $1,500, and then you are expected to pay it back (along with additional fees) when your next paycheque comes in — hence the name “payday” loan. In Ontario, the normal period is 14-28 days, but the longest period before you’re required to repay the lender is 62 days.
Payday loans are supposed to help individuals experiencing a cash shortfall or emergency that they don’t have the savings to cover. It’s not supposed to help with ongoing costs and everyday expenses like groceries or rent. The main reason for this is that payday loans come with a lot of financial risks.
The Trap of Payday Loans
Payday loans come with additional fees and very high-interest rates. You’re offered a small loan, but that amount can come with a 400% interest rate or higher. The average interest rate for a credit card is approximately 20%.
This is how borrowers get stuck in a payday loan trap. They take out a small loan to help them out when money is tight, and then the small loan quickly balloons because of additional fees and interest. It’s too big to pay off at once, so they pay off a portion and try to cover the rest later. Every month, the debt snowballs and gets harder to pay down. They don’t have enough in the bank to cover the higher costs — after all, they took out the loan because they didn’t have any savings to rely on.
The “one-time” loan suddenly turns into months or even years of payments. Payday lenders are also notorious for practicing predatory behaviours in hopes of attracting desperate borrowers and increasing their debt loads. This is why so many borrowers are left wondering how it’s possible to get out of payday loans unscathed.
How to Get Out of Payday Loans
Are you wondering how to get rid of payday loans? The key to getting rid of a payday loan is speed. The longer that you leave it, the bigger it will grow. So, try your best to pay off the total by the first deadline before the interest rate and additional fees accumulate.
Whatever you do, don’t take out another payday loan to help tackle the original repayment. It’s a very risky move that can add to your debt load and increase your time in the payday loan trap. The more payday loans that you have, the harder it will be to break free from the cycle.
There isn’t an easy way to get out of a payday loan. There may be a cooling-off period in the first day or two where you can cancel the loan without a fee. If you’ve crossed that deadline or you’ve already spent the funds, then you can’t avoid repayment. You can ask the lender for an extended payment plan (EPP) so that you have more time to come up with your repayments.
Consolidating Payday Loans
If you don’t have the resources to repay your payday loans, you could turn to a debt consolidation loan as a solution. A debt consolidation loan is a debt-repayment method offered by banks and credit unions. It’s a loan that merges multiple debts into one large debt.
With this method, you can make a single payment for this combined debt every month at a lower interest rate. Considering how high interest rates are for payday loans, debt consolidation for payday loans could be very useful.
What are the problems with this solution? You will need to meet certain qualifications to get approved for debt consolidation for payday loans. Banks and credit unions often require a form of collateral, whether it’s an asset or co-signer, and they often require good credit scores. Without these qualifications, you may not be approved.
Another problem with payday loans consolidation is that if you default on your payments, you could lose your collateral and end up with a greater debt load. If you don’t have the resources to repay your payday loans, and you can’t get a consolidation loan from a bank or credit union, it may be time to get some serious help. Your next step should be to contact a Licensed Insolvency Trustee and ask them about consumer proposals and debt consolidation. They can answer questions like “How does a consumer proposal consolidate my debt?” and “How long will it take?”
Payday Loans & Consumer Proposal Debt Consolidation
How does a consumer proposal consolidate my debt?
A consumer proposal is a legally binding agreement between you and your unsecured creditors to repay a certain percentage of your debts through a repayment plan. The repayment plan can last for a maximum of 5 years. Once that is over, you have completed the proposal, and you are officially released from those debts to your unsecured creditors.
When the proposal officially begins, your unsecured creditors must stop collection calls and stop taking any legal action against you. They also must stop collecting interest — the amount you agreed to repay will not change after the agreement goes into effect. Pausing interest can be an incredible source of relief when you’re dealing with payday loan debt. That’s what makes it an ideal choice for payday loans consolidation.
A Licensed Insolvency Trustee is the only professional that can file a consumer proposal for you. They will help you craft the agreement, contact creditors, arrange payments and more. They can also answer any questions that you have about filing a consumer proposal and debt consolidation.
What Debts Can Be Consolidated in a Consumer Proposal?
Consumer proposals are meant for people who owe less than $250,000 (excluding the mortgage on their primary residence) in unsecured debts, which they can’t repay in a reasonable manner or realistic timeline.
If you owe more than $250,000 (excluding the mortgage on their primary residence), you will not be eligible for a consumer proposal. In this case, you should talk to a Licensed Insolvency Trustee about a Division 1 or personal bankruptcy for the consolidation of your payday loans.
What is Unsecured Debt: Unsecured debt is a loan that is not backed by collateral. If the borrower defaults on the loan, the lender can’t recover their investment automatically. They have to use other methods to recoup their funds.
They can contact the borrower about the default to ask for repayments. They can dole out penalties (for example, late fees). They can take legal action, suing you for the funds or arranging to garnish your wages.
Because this is a riskier investment for the lender, an unsecured loan tends to have higher interest rates to incentivize repayment.
A payday loan is a prime example of unsecured debt. The lender doesn’t have the power to take the original funds back after giving out a payday loan. Instead, they attach steep interest rates to the borrowed funds to incentivize immediate repayment (by your next “payday”). The longer the borrower’s debt goes unpaid, the more interest accumulates and the bigger the debt grows.
What Is Secured Debt: Secured debt is a loan that is backed by an asset — this is “collateral.” So, if the borrower defaults on this loan, the lender can use the asset to repay what they are owed. These loans often have lower interest rates than unsecured loans.
A mortgage is a common type of secured debt. If someone continues to miss their mortgage payments, the lender can seize the property and sell it. Other types of secured debts are car loans, personal loans and pawn loans.
More Than Payday Loans Are Included in a Consumer Proposal
A consumer proposal isn’t just a solution for payday loan consolidation. It covers other types of unsecured debt: credit card debt, personal loans, unpaid utility bills and taxes owed to the Canada Revenue Agency. Student loans can also be involved in a consumer proposal, but they are only discharged if it has been at least 7 years since you’ve stopped being a student — or 5 years after you’ve stopped being a student when you apply for financial hardship.
You will not be able to pick and choose which of these unsecured debts are included in your consumer proposal. All unsecured debts must be a part of the agreement by law.
There are some other types of unsecured debt that will not be discharged through a consumer proposal, such as unpaid child support payments, court fines or any form of fraudulent debt. If you have any questions about what can and cannot be covered, you can talk to your Licensed Insolvency Trustee. They can answer all of your questions.
Filing a Consumer Proposal with David Sklar & Associates
If you need debt consolidation for payday loans and live in the Greater Toronto Area, contact David Sklar & Associates for help. You can call us at 416-498-9200 to book a free consultation. During that consultation, one of our licensed insolvency trustees will assess your financial situation and determine what will be the steps for getting you out of debt — even if it doesn’t involve our services.
We don’t want you to be stuck in the payday loan trap. We want to help you get out and put that financial trouble behind you.