To put it mildly, I’m not a big fan of payday loans. They carry a very high interest rate, and since you are required to pay them back with your next paycheque they often lead to an endless cycle of obtaining a new payday loan to repay the one you got last week. Payday lenders are a lender of last resort, where you go to borrow when a “regular bank” won’t give you a loan.
Banks and credit unions don’t offer payday loans, so I was somewhat surprised to see that Vancouver City Savings Credit Union, a large credit union with 57 branches and $17.5 billion in assets, has decided to start offering payday loans. They call it the Vancity Fair & Fast Loan™, and if you qualify you can borrow from $100 up to $1,500 and pay it off over up to 24 months. They say that this loan offers flexible payback schedules, it “can help you establish a credit history”, and you get quick approvals.
Sounds nice and friendly, but I have a lot of issues with these types of loans. Despite the media hype, consumers need to be very cautious before assuming these loans are good credit options.
No cheaper than credit cards
First, the interest rate advertised on their website is 19%. While 19% is less than a payday loan lender will charge, that’s about the same as the interest rate charged on credit cards by every other bank in Canada, and much higher than the rates on a conventional personal loan or line of credit. It’s very expensive borrowing.
Not the best credit repair option
Second, while a payday loan “can help you establish a credit history”, a small loan has a minimal impact on your credit score, and so if you want to establish or rebuild your credit score this is not the best strategy. You pay a lot in interest for minimal benefit. If establishing a credit history is your objective, get a credit card. The cost is the same or less if you pay it off, and it’s more flexible.
To control your spending, set a low limit and make sure you pay it off monthly. In fact, showing you can pay off regular purchases on your credit card will have a better impact on your credit report than a small ‘payday’ style loan.
The VanCity Fair & Fast Loan™ is potentially more dangerous than a payday loan
But I’m just “nit picking” here, complaining about high interest charges and a minimal credit score impact. The bigger issue is that there is no pre-defined limit to the amount you can borrow.
With a payday loan there are limits. For example, in Ontario, section 35 of the Payday Loans Act requires a payday loan lender to wait seven full days after the repayment of a loan before they can lend again to the same person. In British Columbia, if multiple loans are given in a short period of time, the borrower must be allowed to stretch out the payments (section 23, Payday Loans Regulation).
Do these rules apply to the VanCity Fair & Fast Loan™? I hope so, otherwise a borrower could get a $500 loan every month, and stretch the payments out over many months. With each new emergency you run to your friendly neighbourhood bank or credit union and borrow another $500. Next thing you know you owe $5,000 not $500. That’s a lot worse than getting one $500 payday loan that must be repaid in two weeks. At least with a payday loan there are legal limits.
So what’s the solution?
The best solution is to start a savings plan so that you have an emergency fund if you find yourself short of cash. But what do you do today if your rent is due tomorrow? I would suggest the first call should be to your landlord, where you explain that while you realize the rent is due tomorrow, you won’t be able to pay it in full until next Friday when you get your paycheque. Your landlord won’t be happy, but it’s unlikely you will be evicted for paying your rent a few days late.
My point is that in most cases you have options, and getting a high interest payday loan should be at the bottom of that list.
I don’t fault the big banks and big credit unions for finding ways to make money. They are businesses, and they must generate a profit to stay in business. I’m a businessman as well; I understand. It’s not the bank’s job to suggest that perhaps you should talk to your landlord instead of getting a payday loan. There’s no profit in that.
So the solution is that you must take care of yourself. Understand the full costs of borrowing, and know your options and make a plan to avoid payday style loans.
You’ll be glad you did.