How to get out of payday loans

If you had to borrow a payday loan and couldn’t repay by the deadline, you might have chosen to take out another “just to get by.” This probably led to an additional loan with more fees, likely followed by another and another, and soon the debt started to pile up. If you find yourself in this situation, there’s still hope – you can get out of a payday loan cycle and avoid the huge costs of debt. All you need is the right strategy and proper planning.

How does the payday loan cycle of debt work?

Payday loans are loans that come in the form of a cash advance – usually for small amounts of up to $1,500 – that you’ll need to pay back by your next paycheque. They are relatively easy to qualify for even with bad credit, making payday loans an easy and convenient way to get your hands on fast cash.

But that convenience often leads to trouble…

The problem is that payday loans often come with extremely high fees that can cost you hundreds of dollars on top of what you borrow. This can lead you to owe more than what you can afford to repay each month. When that happens, people often end up borrowing a second payday loan to cover your rent, groceries and other expenses.

In the end, you may find that you’re stuck in a loop of taking out and repaying payday loans like clockwork in order to cover the loan fees and your expenses. This can end up costing you thousands of dollars above what you originally borrowed over a long period of time.

How to get out of payday loans

One of the best things you can do when considering how to get out of a payday loan debt cycle is to find a way to consolidate your debt and lower your monthly payments. Because payday loans carry extremely high interest rates — anywhere from around 400% to over 700% – you’ll want to stop borrowing and merge all your loans into one larger loan with a lower, more manageable APR. In fact, a survey conducted by the Financial Consumer Agency of Canada found that one-third of the people who use payday loans repay it using something other than their paycheque.

You can get payday loan help using any of the following methods:

1. Debt consolidation loan
2. Balance transfer credit cards
3. Debt relief companies
4. Nonprofit organizations
5. Asking friends or family for help

1. Debt consolidation loan

If you’re stuck in a cycle of applying for payday loans to get to your next paycheque, you might benefit from a debt consolidation loan. These loans are offered by reputable financial institutions, and many are designed for borrowers with bad credit. You’ll typically just need to be able to prove that you have enough income coming in to cover your repayments.

Once you’re approved for a debt consolidation loan, you can use it to pay off your payday loan. You’ll then be able to carry that balance forward with lower interest rates and a longer repayment term. This means that you’ll be able to make small monthly repayments that fit your budget, and you won’t be stuck paying hundreds of dollars in fees every two weeks.

What if I have bad credit?

You can still get payday loan help even with bad credit through debt consolidation loans designed for people with bad credit. You can expect interest rates on these types of loans ranging anywhere from 10% to as high as 50%, which is higher than you’d get with a standard loan. But a bad credit debt consolidation loan will still be much cheaper than the hundreds you’ll pay in interest with a payday loan.

If you’re borrowing under $2,000, you may also be able to apply for a no credit check loan without any hassle. Alternatively, see if you can enlist a co-signer.

Must read: Best debt consolidation loans in Canada

How to compare debt consolidation loans

If you think that a debt consolidation loan is the right fit for you, you’ll want to start by comparing lenders. You can begin to look at some of the following features to find the best loan for you:

• Interest rates. Look for the lowest interest rates on offer so that you can put the largest part of your payments towards your principal.
• Fees. Watch out for hidden fees in your contract so that you’ll know what extras you’ll need to pay.
• Term. Search for the shortest loan possible with payments that you can still afford. This will make sure you don’t end up paying more interest than you need to over time.
• Repayment conditions. Try to find a lender with flexible terms and the willingness to work with you if you run into financial difficulties.
• Customer service. Find a lender that has good customer ratings and a reputation for responding quickly to customer issues and concerns.

• How to apply for a debt consolidation loan

  If you want to apply for a debt consolidation loan to help you get out of the payday loan cycle, you should follow the steps below to get started:

  1. Check your credit score. You might want to check your credit score before you apply for a loan. This will help you figure out if you’ll be able to qualify for a debt consolidation loan, or if you need to look for a bad credit loan. You can do this by applying through credit bureaus like Equifax or TransUnion.
  2. Compare lenders. If you think you’ll qualify for a debt consolidation loan, you should begin by comparing lenders to find the best interest rates and terms for your loan. You might also like to think about what kind of reputation your lender has for customer service so that you know you can get assistance with your loan if you run into difficulties.
  3. Fill out your application. When you pick the lender you want to go with, you can apply by filling out an application for your loan online.
  4. Verify your identity and income. You’ll usually need to give a piece of ID to prove your identity, along with pay stubs or tax forms to prove your employment status or income.

• Eligibility requirements for debt consolidation loans

  You will usually need to meet the following requirements:

  • Be 18 years old or the age of majority in your province or territory.
  • Be a Canadian citizen or a permanent resident with a valid Canadian address.
  • Have a working bank account (this is sometimes not a requirement – it varies between lenders).
  • Have proof of income.

  Some lenders may have additional criteria that you’ll need to meet in order to apply for a loan.

2. Balance transfer credit cards

Balance transfer credit cards are another good option to consider on your search for payday loan help. These types of credit cards let you move your debt and pay little to no interest on it for a period of time. For example, a balance transfer credit card may offer a 0% APR for 10 months. That means you get a 10-month break from interest payments while you pay off what you owe.

To start with this option, find a balance transfer credit card that lets you transfer your payday loan debt. When comparing card providers, you can give more consideration to those that offer longer zero-interest periods so that you have the most time to pay off your debt.

You’ll typically need good credit to get the best balance transfer credit cards. However, you may be able to qualify for some balance transfer credit cards with fair or bad credit.

To learn more, check out our guide to balance transfer credit cards.

3. Debt relief companies

Debt relief companies will evaluate your personal finances and help guide you in coming up with a plan to get out of debt – whether that’s through debt settlement, debt consolidation, credit counselling, consumer proposal or bankruptcy. This option is best suited for people who are struggling with multiple types of debt by helping you take control of your finances and avoid bankruptcy. Learn more about debt relief companies.

4. Nonprofit organizations

Some nonprofit organizations like Credit Canada and the Credit Counselling Society exist to help you pay off your debt by offering debt consolidation loans, credit counselling services and credit advisors who negotiate with lenders on your behalf. Often, these companies can help lower your monthly debt repayments, lower your interest rate and help you become debt free faster.

If it seems likely that you will not be able to pay back the full amount you owe, your advisor may even submit a Consumer Proposal to your lenders. If they agree to to the terms, this proposal will provide a way to pay back as much of your debt as you can.

You can find a reputable adviser through one of the credit counselling associations listed on the Government of Canada website. Before settling on a counselor, it can be a good idea to:

• Contact and interview multiple counselors
• Only consider counselors who don’t charge for their services
• Understand the terms of working with your counselor

5. Ask friends or family for help

After explaining your situation, one of your friends or family members may be willing to loan you the money you need without having to take out more loans. This type of “personal” loan often has the advantage of no interest attached, making this an attractive option when you need payday loan help.

If the person you talk to is unable to lend you the money directly, you may want to ask them about cosigning a loan with you. This option can be risky for the cosigner, so some may not want to put their credit on the line. But if you can prove you’ll be able to make the monthly payments, a cosigned loan will generally have better interest rates.

How else can I get out of payday loans?

If none of those methods are a good fit for you, then here are a few other options you can consider when wondering how to get out of payday loans.

• Secured loans. You may be able to get approved for a bigger loan with lower interest rates if you put an asset on the line to secure your payments.
• Peer-to-peer loans. Peer-to-peer loans offer lower rates, more flexibility, quicker turnaround and fewer fees than many traditional banks.
• Business loans. You could get a low-interest rate on your loan if you’re using your funds to pay for business expenses.
• Filing for a consumer proposal. If you’re not able to get credit from anywhere else, you could consider filing for a consumer proposal to consolidate your debt.

Can a payday lender garnish my wages?

Yes, if you don’t repay your payday loan, a lender or debt collector can usually sue you to collect. If they do so and win, or if you don’t dispute the lawsuit, the court will rule against you. The court order will state the amount of money you owe, which means the lender or collector can then get a garnishment order against you. Wage garnishment means your employer is legally obligated to hold back a portion of your wages for your debts.

What could happen if you default on a payday loan

Finder survey: What is the main reason Canadians of different ages give for getting a payday loan?

The 4 tips to get out – and stay out – of payday loan debt

Debt doesn’t come out of the blue. When you take a deeper look at your finances, you’ll likely find structural issues that led to your need for a payday loan. Credit counseling and budgeting are great ways to develop financial literacy and understand how debt works. Once you know how to tackle your spending habits and lower the costs of your day-to-day life, you’ll improve your credit and reduce your chances of being caught in a cycle of payday loan debt again.

Here are some other ways you can chip away at your debt without having to rely on loans and credit cards:

1. Create savings by cutting expenses

When your finances are stretched thin, any extra money helps. Examine your monthly spending and think about what you could eliminate. Some options are going without cable TV for a few months or cutting out daily extra expenses like coffee or snacks.

2. Find odd jobs

You might be surprised how easy it is to make extra cash. The Internet offers a wealth of gigs that you may be able to quickly qualify for and complete.

3. Sell things you don’t need

Most of us have things laying around the house that we no longer need. If you’re willing to part with them, websites like Kijiji or eBay are great places to sell from the comfort of your home, and the money you earn could help you pay off your loan quicker.

4. Set a budget

Setting a weekly and monthly budget can give you the structure you need to make wise spending decisions. Once you’ve created a reasonable budget, set systems to help you stick to it. For example, if you’re tempted by credit cards, put them away and only use cash for a few months. This should help build your patience while lowering your future debt. Learn how to create a budget in our step-by-step guide here.

Bottom line

When you’re grappling with how to get out of payday loans, realize that it’s not necessarily easy, but it is possible. By consolidating your payday loans and paying down your debt, you can work your way out of a debt spiral while building good financial habits.

Frequently asked questions about getting out of payday loans

• If I don't pay a payday loan, will I go to jail?

  No. There are laws put in place in Canada that make it clear you can’t be jailed for failing to pay a debt. Bankruptcy laws were created to provide protection for those who cannot pay back their debts. Note that, if you fail to repay a debt, your lender to might be able to sue you to regain what you owe. If you’re having trouble managing your financial obligations, speak to a financial advisor or lawyer to learn about your options.

• Should I declare bankruptcy if I’m in a payday loan cycle?

  Bankruptcy is an option to get out of a payday loan cycle, but it comes with the disadvantage of staying on your credit report for a number of years, and it’s usually a red flag for lenders when you apply for future loans.

  If possible, exhaust all your other options before filing for bankruptcy.

• Why is it so easy to get trapped in a payday loan cycle?

  Payday loans often need to be repaid in just 2-4 weeks. This leaves borrowers little time to find enough money for repayment. On average, most individuals who take out payday loans shell out hundreds of dollars in fees to continually borrow less than that over the course of a year. Also, since many payday loans come with no credit checks, it becomes very easy to borrow money, but much harder to pay it back.

• Why is it important to interview a credit counselor?

  It’s important to interview potential credit counselors to make sure they have your best interests in mind. To find good credit counselors that don’t require a fee, start with this page on the Government of Canada website.