When to Use a Pay Day Loan

Never use a Pay Day Loan. There is no reason to use this service, ever.

I was going to leave that as the entire post, but I suppose I should elaborate a little on my statement.

If you are considering a Pay Day Loan, you are in a bad place financially. Adding a pay day loan will simply add an accelerant to your financial demise. A ridiculously high interest rate loan is not going to help get you back on your feet. All a pay day loan will do is get you to bankruptcy faster.

What should you do if you are thinking of getting one of these short term high interest rate loans? Get Help!

See a licensed bankruptcy trustee. They will either recommend a plan on how to pay things off, or a Consumer Proposal or maybe that it is time to declare bankruptcy. Remember this is a one-time thing, you can’t keep doing this.

Pay Day Loans
Similarities Pay Day Loans and Loan Sharks

If you are thinking of going to a credit counselling firm, research them and figure out if they are reputable. How much this is going to cost? Some firms are helpful, others, not as much.

Sometimes you end up in this financial place due to life related issues, maybe it is time to talk to someone about that too? Talk to someone about the issues in your life, may help you fix your lifestyle (and your financial lifestyle). If you don’t understand how you got to this place (financially), how can you be sure you won’t end up here again?

Stay the hell away from Pay Day Loans and the new “On line loans” system coming forward as well. Fix the problem, don’t dig a deeper hole.

Simple Advice

No question has the answer, “You should get a payday loan”.

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Venn Diagrams For Borrowers

They say a picture is worth a thousand words, so this week I have written up a storm, however, this one has been hanging around in my archives for a while, waiting to come out and state the obvious. I borrowed the idea from a similar diagram comparing a cat and a homeless person.

Pay Day Loans

Similarities Pay Day Loans and Loan Sharks

Anyone care to disagree with this diagram, or did I miss other services made available from both businesses.

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In Defense of Pay Day Loans?

One of the contributors to this site is Mrs. C8j, and last week she handed me an article from the Globe and Mail that absolutely flabbergasted her (admittedly Mrs. C8j can actually rant better than I can), written by Sean Silcoff with the title, “Expensive but not excessive: why Pay Day Lenders Aren’t a Rip Off”. Most of my readers know my opinions on these modern-day Loan Sharks, however, if you want to know my opinion read Pay Day Loans the Crack Cocaine of Personal Finances.

After reading the title I figured this was a misdirection story, where if you read the actual article the writer is actually saying the opposite and is attempting to suck you in with an inflammatory title, but I was dismayed to see that this really was not the case. I’d include a link to the article, however it is behind the Globe’s pay wall, and you have to be a Globe Subscriber to read it (click here if you are a Globe Subscriber).

pay day loans

Globe + Mail ?

The article is actually quite hum drum (not written in my style of ranting like a lunatic in every paragraph), and I kept wondering what tripped Mrs. C8j’s Rant-Fest, and then I read the second to last paragraph, and I must admit my flashing red-light rant-o-meter went off as well.

Given the fact the Globe protects this content with their Pay Wall, I will paraphrase what is said:

BCM thinks it says, “… this is a regulated business that doesn’t make a lot of money because they deal with bad borrowers and thus shouldn’t be viewed with scorn…”

No-Fee Scotiabank Value Visa

The phrase that really caused me to almost choke on my coffee was, “… quick and convenient source of moderate amounts of cash…”. That reads like something out of a Pay Day Loans store’s brochure, “… quick and convenient …”?

Those are actually two criteria I always use when choosing a lender, also what kind of hot chicks they have in their ads (since everyone knows that hot chicks dig dudes who use Pay Day Loan services) (for those sarcastically impaired my apologies for me not marking this paragraph as a sarcastic opinion on my part).

Pay Day Loans or Loan Sharks?

The gist of the argument put forward in the article seems to be that because Pay Day Loan companies don’t make a lot of money, thus we shouldn’t view them as a modern-day Shylock (I use that as the vernacular for Loan Shark, not as a derogatory antisemitic term). My opinion is that Pay Day Loan Store Fronts aren’t making a lot of money mostly because there are so damn many of them (in downtown Ottawa, in the core, there is pretty much a pay day loan store front on every block).

Yes their customers are folks who may not pay them back, but my guess is they are not making a fortune on their 500% per annum loans due to a glut in the market. There are more pay day loan shops than banks these days, and now with competitors getting rid of their store fronts and running solely as Internet Web Sites, this industry could be ready to make even more money off their customers (following the lead of the Banks and other service industries).

The final paragraph seems to be borrowed from Dr. Henry Morgentaler, in that it is preferable for Pay Day Loan customers to use this legal service, than a more dire choice (i.e. loan sharks). My view of that is: maybe it would be better if we had credit counselling services on every street corner instead? I am not making any statement about Abortions or Gun Control either (let’s deal with one controversial topic at a time).

I honestly don’t understand why the Globe would publish this story, or why it was written, any ideas good reader? What’s next, articles defending the High MERs in Canadian Mutual Funds?

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Pay Day Loans are Crack Cocaine of Personal Finances

I said it! I meant it! Pay Day Loans are predatory short term, high interest rate loans designed to entrap their customers in a financial death spiral.

Yup, if you look down the side of this post, you will find ads for Payday Loans, for that I apologize, I need to look into Adsense on how to turn those off, but yes, Pay Day Loans are the Financial Equivalent of Crack to your finances.

I have no idea how Crack feels, and I do not wish to ever learn (I have much the same view on Pay Day Loans too), however, prevailing opinions is that Crack is highly addictive, and it’s high diminishes over time so you have to use it more but you still don’t ever reach that initial high, much like a Pay Day Loan. Pay Day Loans are highly financially addictive, and once you start using them, your financial well-being goes down hill quickly, and they are hard to kick as a habit.

Pay Day loans are modern day loan sharks

Modern Day Loan Sharks

Why am I bitching about this still? Where I live in Ottawa is a relatively affluent area (although it does have a food bank), but it has more than a few Cheque Cashing/Pay Day Loan “stores”. All I can ask is What the Hell is Going on?

Interest rates are ridiculously low and these places are spreading faster than the black death in the middle ages, what happens when interest rates start going up? There are more regulations on these places, but I just don’t understand why there are so damn many of them.

Please feel free to comment on this (any comments about how I am a hypocrite for having ads on my site for these parasites, expect a colourful reply, but take your arguments to Google for allowing them to advertise) topic, and any insight as to why they are multiplying in a Fibonacci sequence would be helpful too.

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Let’s Go Buy Some Money

I note that the pay-day loan places are now changing their names to sound much more friendly, and most of them are using names that would portray them as a “Money Store“, and I guess there is a ring of truth in that description since you are going to there to buy money.

Are you going to get money on a discount? No, that won’t happen. Will there be a “sale on money” and you’ll get it for cheaper, maybe, sometimes, but you are still buying money there, but not at a very good rate.

How Much Money Am I Buying?

If you ask the Pay Day Loan Association (and according to this 2006 CBC posting), typically you are buying about $300 now and you’ll pay it back in about 10 days or so, once your pay shows up. At the end of those 10 days or so, you can expect to pay about $363 dollars (maybe less, possibly even more, but I haven’t stepped into one of these establishments so I couldn’t say for sure). Remember even with the new Payday Loans Act in Ontario, you can still be charged $21 service charge for each $100 you borrow (so if you borrow $300 you could get hit with a $63 fee). That doesn’t seem to bad, does it?

You have bought $300 now, for about $365 in 10 days, but maybe you needed that money to pay your rent, so it does have some value I suppose. You have now paid somewhere more than 500% interest annually (not compounded) to buy this money for a short-term loan (but wait that’s 21% only, no, you paid it back in 10 days, 1/36th of a year, if you look at that over the whole year that’s a lot more). I am sure other financial bloggers could give you the exact tally, suffice it to say it is astronomical over the year.

Yes, but it really only cost $63 so that isn’t that much, is it? Think about that statement, you just borrowed $300 because you didn’t have enough money before your pay arrived, and now you have started your next pay period $63 in the hole, what are the chances you get another pay-day loan soon? I would say pretty high, but that is only my opinion.

Have a look at the Capping Borrowing Costs report from February 2009, it is quite enlightening what is still allowed in this modern day usury program. My comment about getting another loan quickly is actually not as flippant as I thought, and I quote:

The Canadian payday lending industry depends heavily on repeat business.  For every loan to a new customer, payday lenders make 15 loans to repeat customers on average across the country.5  As a result, even the largest stores have fewer than 1,500 different customers in a year, with a typical number of customers ranging from 200 to 500.  A consumer survey6 indicates that almost half of Toronto’s payday loan borrowers have taken out six or more payday loans in the last 12 months.

So once you are in this financial trap, it is not easy to extricate yourself.

Admittedly the loan company is taking on quite a risk, but they are paid very handsomely for that risk, and given the number of storefront pay day loan “stores” opening in my area, it must pay well enough.

I realize it is easy for me to comment on how this isn’t something you should ever use, as a financial service, but I do realize sometimes folks end up in dire financial predicaments, but this should not even be your last choice, because as the report points out, once you start using this service, it is a lot harder to stop using this service.

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