Taking out any type of loan, with any lender, will cost you money, and payday loans are no exception. But given how much attention payday loan costs get, we thought it worth exploring the topic to see how payday loans really compare to other borrowing options. Let’s dive in:
Costs Associated with Payday Loans
The most important fact about payday loan costs is that they are limited by the government; specific laws dictate how much a payday lender can charge for their loans in any given province. So what are these charges, and what do they consist of?
Basic Borrowing Cost
All loans have a basic borrowing cost, usually indicated by an interest rate. But because payday loans are such short-term, small loans, almost always repaid in one lump sum on a set date, most lenders and borrowers find it simpler to look at their cost as a single number. For example, Magical Cash charges $14 per $100 borrowed. No need for compounding interest or loan calculators; you know that for every $100 you borrow, you’ll repay $114. It’s that simple.
Borrowing Fees
The beauty of the single cost of a payday loan is that it includes many of the borrowing fees often associated with other types of loans. Application fees, processing fees, arrangement fees, admin fees – all are rolled into and included in the single borrowing cost. There should be no extra fees or hidden costs associated with a loan from a reputable payday loan company.
Repayment Fees
Similarly, it costs no extra to repay your payday loan. If you make your loan repayment on time and as agreed, the single borrowing cost covers closing out the loan. This is also true if you repay early; there are no early repayment fees.
Penalties
The only time you’ll pay more for your payday loan than the single borrowing cost is if you fail to make your loan repayment as agreed. If this is the case, several things may happen. You may be charged a penalty by the lender if your repayment cheque or pre-authorized debit fails to go through because of insufficient funds in your account. The maximum amount a lender can charge for this is set by the provincial government. (You should also bear in mind that your bank may have its own fees for bounced payments).
The second thing that will happen is that the cost of your payday loan will increase as the borrowing period extends. The rate of this increase depends on the contract you signed and the policies of the lender you chose; both the original cost of the loan and all penalties you have incurred will count as “outstanding” and therefore accrue interest over time. This means that the longer your payday loan is outstanding, the more it will cost.
The Cost of Payday Loan Alternatives
So that’s payday loan costs covered. But what about the costs of some common alternatives to payday loans, like overdrafts, credit card cash advances, and other types of personal loan?
Overdraft
Any money borrowed against your bank overdraft will be charged at an interest rate set by your bank; this rate can vary but typically sits in the 19-22% range, charged daily. So every day you’re using your overdraft, the cost to do so increases.
There are fees associated with overdrafts too, that can vary between banks and account types. Most Canadians pay an annual fee simply to hold a bank account with an overdraft; there may also be fees for exceeding your overdraft limit, or simply for using the overdraft at all. You’ll need to read the fine print of your banking agreement to understand exactly how much using your overdraft will cost you; there is no hard and fast rule for everyone.
Credit Card Cash Advance
A credit card cash advance also has multiple possible costs. The major one is interest; again the interest rate can vary, but most cards charge in the range of 20-30%. There are almost always cash advance fees, which are usually flat and of the order of $3-10, regardless of how much cash you withdraw.
Credit cards also have annual fees to hold, and there will be fees associated with exceeding your credit limit and for missing repayment deadlines. So credit card cash advances are another case where each individual will need to read the terms and conditions of their card, before using it, to understand how much it’ll cost to borrow money in this way.
Personal Loan
Lastly, there are more traditional personal loans. Putting aside whether bad credit borrowers are even able to access personal loans, these instruments have a variety of costs that can depend on the lender, the loan type, and the financial profile of the borrower. So to fully understand the cost of any personal loan, you need to know:
- Loan amount
- Loan term
- Interest rate (and interest rate type: variable or fixed)
- Application fees
- Processing fees
- Admin fees
- Valuation fees
- Arrangement fees
- Early payment fees
- Late payment fees
- Closing fees
As you can plainly see, payday loans are in many ways much simpler than their alternatives! For more information, take a look at our FAQ or see how it works when using Magical Cash for your borrowing needs.
