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Why a payday loan can make money problems worse

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Q:


I work in construction and a few months ago when the second wave started I was short on child support. A buddy on my team suggested a payday loan. It got me the money I needed, but little did I know it would snowball into huge debt. After I got the loan, the following month I couldn’t afford to pay my rent, so I got another loan. My truck was about to be repossessed so I got loans online because my bad credit means I can’t get money from my bank. Now I owe more money on all those loans, plus the credit cards that I already used up before, than I earn. I don’t know how to make all the payments and the pressure is killing me. How do I get out of this huge mess? ~ Damon

A:

The pandemic has been extremely hard on all of us in many ways, and with the pressure it can be hard to step back and make thoughtful decisions. When it comes to our money, the long-term consequences of costly decisions can unfortunately lead to difficulties.

A

recent survey

by the Credit Counseling Society shows that one in four Canadians are worried about their current financial situation. However, turning to expensive short-term loans ultimately does little to ease the anxiety. Think of it this way: if you are short on funds now and have no savings on hand, how will you be able to pay off the short-term loan, plus interest and fees, and still manage to live with the money you have left? As many have discovered, the answer is “you don’t”. You pay off the loan with the money you have, but take out a new loan and then pay it off until your next paycheck.

A payday loan, in person or online, can seem like an easy way to make up for a shortfall from paycheck to paycheck, especially if you’ve exhausted conventional credit like credit cards, line credit or overdraft. But in reality, most people find out the hard way that they have inadvertently gotten themselves stuck in a cycle of debt that is hard to escape.

The longer you ignore the debt, the worse it gets

When you’re used to turning to any available credit card for a cash advance to cover daycare or rent, or clicking on an app for an instant online loan to pay for living expenses ( for example, groceries, gas, medicine or household bills), it can be hard to imagine how you will survive without these lifelines. But when you ignore your debts, they tend to get worse, not better.

Our investigation

also found that more than a third (36%) of Canadians would not seek professional financial advice until their debt levels reached an uncomfortable level. The truth is that those who reach out earlier usually have more options available to them. And having a plan, however difficult, is better than wondering when the other shoe will drop.

No one can argue with the convenience of an instant loan, and regaining control of your finances can seem like a daunting task. But ask yourself honestly what your future will look like if you don’t act. How are you going to handle all the stress and pressure?

Alternatives to expensive loans for people with bad credit

Learn how to escape the payday loan cycle

To break free from the payday loan cycle, you must first understand what has put you in debt. Think about your situation and consider:

● Was there an emergency expense that emptied your savings account and you didn’t have a chance to replenish it before facing the next cash crunch?

● Has your income decreased?

● Have your expenses increased?

● Where are you with your budget? Have you a?

● Are there any non-financial factors that have contributed to your situation?

● Do you have debts that you should have settled earlier?

Knowing why you sought out payday loans will help you take steps to avoid relying on them again to make ends meet.

Check your budget

Then take a look at

your budget

. The best way to manage your debts will depend a lot on their situation. If you don’t have a budget, now is the time to create one. Once you know the total of all your expenses, including a small saving for expenses that occur periodically throughout the year, subtract them from your income – how much is left? If you have money left over, your options will be different from those that would apply to your entire paycheque.

Open a new bank account

Next, you’ll want to keep whatever paychecks you have safe. You may need

open a bank account

at a financial institution where you owe nothing. When you accepted payday loans, you also gave them permission to take payments from your bank account. While you’re working to turn your situation around, you need to keep the money you have safe. For other debts that you have overdue, it’s the same thing; your money could be deducted from a debt as soon as your paycheck is deposited.

Work out a payment plan

If you have money left in your budget,

propose a payment plan

to your payday lenders or businesses. Even though they may not agree, staying in regular communication with them and making regular small payments is very helpful.

If you don’t have cash available to make payments,

acquire help

before your situation gets worse. The last thing you want is to have your wages garnished and child support withheld at source. There’s no shame in asking for help when you need it, just make sure it’s reliable and available at little or no cost. Expert advice will go a long way in gaining the cooperation of your creditors as you strive for relief from all your debts.

Assess yourself for warning signs of debt

Create your own safety net

When outlining your budget, be sure to set aside a small amount to open an emergency savings account. You might feel like the money would be better spent paying off your debts, but some savings will actually help keep you out of debt. It seems so counterintuitive, but

savings really is a super power

. Call it Plan B, a safety net, or just an emergency account. With some cash to lean on, you won’t need to take out a new loan when you face your next money crisis. Start small and grow. You’ll be surprised how quickly it adds up.

Check your own credit report

There is no uniformity across Canada as to whether or not payday lenders share information with credit reporting agencies regarding your background. Many of the larger companies report your information, and some of the smaller ones don’t unless you default. The best way to find out what’s on your credit report is to

get a copy of your own report for free

.

Getting a copy of your credit report is also a good way to check where you are with your other debts. Taking care of your payday loans might be a priority, but taking back control of your paychecks will allow you to include all your debts in your payment plans.

When it comes to bad credit, the big question isn’t whether your credit will get worse, but are you making progress in getting back on track financially? He is

it’s not worth obsessing over your credit rating

; do what it takes to get back on track, align your expenses with your income, manage all your debt (not just payday loans), and your rating will work itself out over time.

Consumer Protection

Most provinces in Canada have laws outlining the maximum fees a payday lender can charge, how often loans can be rolled over, and the remedies they must offer customers who cannot afford to repay. their loan. Check what lenders doing business in your province must follow by

your provincial consumer protection office

. Just be aware that no legislation can protect consumers against themselves. While payday lenders are required to disclose the costs of taking out a loan to their customers, someone desperately trying to cope with a cash crunch doesn’t focus on the cost of borrowing. Receiving the money is all that matters to them.

The bottom line on payday loans and quick and easy money


The convenience of instant cash and easy payday loans may seem like the help you need to manage your finances. But there is never a quick and easy fix for debt. Ask for help as soon as possible, because it’s always a good time to stop relying on an expensive and temporary solution to a more serious underlying problem.

Related Reading:

5 reasons to avoid payday loans

How to overcome 8 sources of financial problems

What to do after getting a raise

Scott Hannah is president of the Credit Counseling Society, a non-profit organization. For more information on managing your money or debt, contact Scott by

E-mail

Check


nomoredebts.org


or call 1-888-527-8999.

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