Canadians who are in serious need of cash often turn to payday lenders for their financial needs. While there is nothing wrong with getting a payday loan, it still pays to know the risks associated with payday loans and to consider all options before applying for one.
A recent study by Loans Canada showed that some credit-constrained Canadians do not realise that payday loans are the most expensive form of borrowing. In fact, nearly half of all borrowers have high-interest debt in the form of payday loans.
"Our findings show that many Canadian consumers still have a lot to learn when it comes to their financial health, and we feel that financial education plays a very important role in financial decision making," Caitlin Wood said, chief editor at Loans Canada.
Canadian immigrants, especially those who moved to the country just a few years ago, also need to exercise caution when planning to apply for payday loans.
Since they have limited credit histories, immigrants might find it more convenient to use this type of loan. However, if the goal is to build credit, payday loans are not the answer, said Margarita Arbelaez, a communications specialist at Windmill Microlending.
"Payday lenders do not report borrower compliance to credit bureaus. Therefore, borrowers cannot build credit or improve their credit score. Consequently, as a newcomer, it is crucial to think carefully before deciding that a payday loan is your best option," she said in a think piece for Canadian Immigrant.
Arbelaez said payday loans should be the last option for locals and immigrants who need financing. While payday loans are accessible, they come at higher interest rates that could put someone in a debt trap, she said.
"If what you want is to start a business or pay for education, training, assessments, credentials, or licensing, a microlender can be your best option. They are non-profit organizations that offer smaller loans and typically require less documentation than banks and, depending on the lender, provide low interest rates," she said.