How do short term loans work?
Need a loan to see you through until your next payday? Find out how a payday loan works before you apply for one.
Short term loans, also known as payday loans, offer quick access to cash for those who need immediate financial help in the short term. Due to the speedy application process and quick turnaround time, there isn’t a lot of time to understand how the short term loan process works.
So, before you click that button to submit your loan application, find out what you can expect to happen and when, what you will be charged and how, and if a short term loan is even the right option for you.
What exactly is a short term loan?
Short term loans are, as the name suggests, short term credit solutions designed to cover you until your next payday. Also referred to as payday loans, they are for small amounts, usually between $50 to $1,000, and are usually repaid within 30 days or less. The actual terms you are given and the amount you’re able to borrow differs, depending on where you live, as well as your ability to make your repayments and the lender you apply with.
⚠️ Warning: be cautious with short-term loans
If you're experiencing financial hardship and would like to speak to someone for free financial counselling, you can call the Credit Counselling Canada on 1800 007 007. It is open from 8:00am to 5pm, Monday to Friday. When comparing short term loans, ensure you take into consideration any fees, charges and rates you may be charged.
Alternatives to short-term loans
Consider these alternatives before applying for a payday loan:
- Use online Government resources. The Financial Consumer Agency of Canada website demonstrates how small amount loans work – and suggests alternative options that may help you.
- Payment plans. Talk to your electricity, gas, phone or water provider to see if you can work out a payment plan or receive an extension on your due date if you’re behind on payments.
- Contact your creditors. Speak with creditors about extending the due date of your payment, or working out a new payment plan that works for both of you. Seek personal loans elsewhere. Consider a small personal loan from a bank or a credit union. You may qualify for a loan with much lower interest rates than those offered by payday loan companies.
- Pay with credit card. Consider paying with your credit card to cover your emergency bills or payments. This is not a long term solution, as you’ll need to pay off the balance as soon as possible, but it’s an alternative to a short term loan with high – and immediate – interest rates.
Cash Money Payday Loan
- Minimum loan amount: $100
- Maximum loan amount: $1,500
- Interest Rate: Varies by Province
- Fees: Up to $17 per $100 borrowed (rounded to nearest dollar)
- Loan term: 12-14 days. Varies by Province
- Turnaround time: Within 2 hours with INTERAC e-Transfer® if approved
- Key requirements: Be 18+ years old, provide proof of recurring income
Compare short term loan options
Check the websites of any lenders you’re interested in to confirm they operate in your province of residence.
What is the process of applying for a short term loan?
The process of applying, being approved for and receiving a short term loan will depend on the lender you’re applying with. The typical process you can expect, however, is outlined here:
- Compare your options. Finding the best loan starts with doing a comparison – compare rates, fees and features to find the loan and the lender that meets your needs.
- Submit your application. You’ll need to check that you meet the lender’s eligibility criteria, and if you do, submit the personal, financial and employment details that are required. This can often be completed online.
- Wait for approval. You’ll find out if you’re approved quickly after submitting your application. If you’re approved, you’ll be sent a loan contract to agree to. Read the loan contract carefully before signing.
- Receive your loan. After signing your loan contract, you can expect to receive your loan in one to two business days, sometimes sooner. The loan will generally be transferred directly into your bank account, although some lenders give you the option to pick up the cash in person at a store.
- Make your repayments. Lenders arrange repayments differently – you may need to sign a direct debit authorization so the lender can debit repayments from your bank account automatically. Another common repayment method is providing a personal cheque, but this is mainly for lenders with physical branches.
What options do I have for short term lenders?
If you’re looking to apply for a short term loan, you have a few options when it comes to choosing a lender:
|Online short term lenders.||Applying for a loan online is quick and easy, and the whole process can be handled without needing to visit a physical location. You can find lenders that don’t require you to fax any documents over and can directly deposit the loan into your bank account within one or two business days.|
|Direct short term lenders.||These lenders can have both online and physical locations and you apply directly with them for a loan. If you apply online, you still might have an option to pick up your approved loan in person at a store if you wish.|
|Loan-matching services.||If you’re unsure which lender to apply with, you can send your application to a loan-matching service. These services work with a panel of lenders and match you with the lender they believe is most suitable for your financial needs.|
|Storefront short term lenders.||Some lenders have extensive branch networks, and if there’s one located near you that’s convenient, you can apply in person at their store. Just bring along the required documentation and you can have your approved loan within the hour.|
Can anyone apply for a short term loan?
While short term loans are known for their flexible eligibility criteria, they still aren’t available to everyone. You’ll need to meet some basic eligibility criteria before being approved for a loan. Any lender that guarantees to provide you with a loan should raise red flags.
Payday loans are available in all provinces and territories across Canada. You should be aware that payday loans are regulated by individual provinces, which means costs and fees can vary. Ensure that any lender you choose abides by the laws of the place you live.
At the time of writing in January 2019, the Yukon, Nunavut and the Northwest Territories do not have legislation regulating payday loans at the territorial level. Payday loans are regulated in these territories at the federal level only.
What are my other small loan options?
If you decide that a payday loan is not for you, you still have other options if you’re looking for a small loan. These include:
- Installment loans. These types of loans are for small amounts of money, however you pay back your repayments over time in installments as opposed to one lump sum like a payday loan. Terms can last anywhere from a few months to five years. You can learn more about installment loans here.
- Credit union loans. Credit unions and other small banks sometimes offer small loans to their existing customers. Salary advances and other loans can be applied for and repaid on your next payday, often for more reasonable rates than offered by payday loan lenders.
- Bank overdraft. If your bank account is in good standing, you may be eligible for a small, personal loan or overdraft. Contact your current bank to discuss your eligibility.Back to top
Are there any features or benefits of short term loans?
When you apply for a short term loan, some of the benefits include:
- Easy application. You can usually apply for short term loans online in under 10 minutes, and you won’t have to fax any of your documents over. There’s no need to visit any physical locations, unless you’d rather apply in person.
- Fast turnaround time. If you’re in need of money quickly, short term loan lenders usually provide almost instantaneous approval. Lenders can have your money to you in one to two business days at the latest, or in as little as a few hours if you apply in person at a store.
- Compare your options online. There’s a wide range of lenders available and you can compare their fees, features and rates online. Once you find the right lender, you can submit your application online. Alternatively, you can apply in person if the lender has a physical store near you.
How are short term loans different from other loans and types of credit?
Short term loans are infamously known for their excruciatingly high fees. They continue to be applied for, however, because short term lenders have more flexible eligibility criteria than other mainstream lenders. This allows people on welfare benefits, with bad credit or on lower incomes to access loans.
Other differences include the repayment terms which tend to be much shorter than for other loans and forms of credit. You can expect terms of anywhere between 7 and 31 days, although sometimes longer terms are offered. The turnaround time is also much quicker with short term loans, as you can access your approved funds in one to two business days at the latest, or sometimes in as little as 15 minutes of being approved.
Who is eligible for a short term loan?
The eligibility criteria can differ between lenders and provinces, however the following minimum criteria will usually need to be met:
- Age. You must be 18 years of age, or the age of majority in your province or territory.
- Residency. You’ll need to be a Canadian citizen or a permanent resident, and have a valid Canadian address.
- Income. You’ll need proof that you have some form of income, whether it’s employment income, investment income, welfare or government benefits.
- Employment. Some lenders require you to be employed, however some will accept you if you are self employed or have another form of income like government benefits or welfare.
- Bank account. Most lenders will require you to have a working bank account. If you apply in person at a store, you may not need a bank account.
What fees come with short term loans?
The interest rate you are offered will depend on a couple of factors, including the lender you apply with and the province or territory you reside in. Keep an eye out for the following fees when comparing your loan options:
|Annual Percentage Rate (APR).||The interest rate you’re charged will depend on the province you reside in and if any regulations apply. Not all provinces and territories have regulations. Interest is usually charged for every $100 borrowed, with rates sitting between $15-$25, or higher in the provinces and territories that are unregulated.|
|Fees for additional products.||Lenders may offer prepaid debit cards along with your short term loan that can come with a separate set of ongoing fees, so be sure to check this before agreeing to accept the product.|
|Rollover fees.||If you choose to extend your loan or take out an additional loan with the same lender, you’ll likely be charged a fee.|
|Late payment fees.||Making any late repayments will likely result in additional fees. A lender can also report you to a credit bureau if they wish.|
|Returned cheque fees.||If you make a repayment by cheque and the payment does not go through or is dishonoured by your bank, you will be charged a fee by the lender and by your bank.|
|Bank fees.||Any time a payment is dishonoured by your bank due to insufficient funds, your bank can charge you a fee.|
How do I repay a short term loan?
There are a few options available when it comes to repaying your loan. Depending on the lender and the type of loan you apply for, you may be able to use any of the following options to repay your loan:
- Direct debit repayments. This is the most common way to make repayments. You will need to provide your bank account details in order for the lender to automatically withdraw your repayments from your bank account. Before you authorize this, make sure you know what dates the repayments are due to come out so that you can make sure you have enough money in your account, and also know how to end the authorization.
- Post-dated cheque. This option is also offered by some lenders, usually by those who have physical stores. This method involves you giving the lender a cheque that it can cash on the day your repayment is due. Remember to still make note of the payment date since you will need to have the cash in your bank account.
Are short term loans a good idea?
This isn’t a question that can be answered on this page. Only you can decide if a short term loan, or any type of loan or financing, is right for your needs and financial situation. Before you apply for a short term loan, you might want to ask yourself the following:
- Are you eligible for any lower cost loans? Find the cheapest source of financing that works for your needs.
- Will the repayments be manageable by you? Most lenders outline the APR that will be charged before you apply for a loan. Work out if this will be manageable with your current budget. If you don’t think you can make your repayments on time, don’t apply for the loan in the first place.
- What are you using the loan for? Short term loans are not designed to fix long term financial problems, but rather to help you get by in the short term. If you have substantial financial problems, consider seeking counselling.
Before you apply for a loan, it’s necessary to have a solid understanding of the fees, charges and terms that you will face.
How can you find the “best” short term loan?