Area of Law: Credit, Debt and Bankruptcy
Answer # 249
What are payday loans?Region: Ontario Answer # 249
What is a payday loan?
A payday loan, sometimes referred to as a cash advance, is an unsecured loan. Typically, the loan is for a small amount and a short-term, usually about 14 days. Payday loans are popular with people who need money immediately and plan to use their next payday earnings to pay back the loan.
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Are payday loans legal?
In Canada, payday loans are allowed under section 347.1 of the Criminal Code, as long as the provincial laws are followed. All payday lenders in Ontario must be licensed by the Ontario Ministry of Government and Consumer Services and licences must be displayed in their store, or on their website.
In Ontario, the Payday Loans Act protects people who take out a payday loan:
- must provide a contract including the amount being borrowed, the term of the loan, and the cost of the loan,
- is not allowed to ask or accept payment by automatic deduction from a borrowers paycheck,
- cannot charge the borrower more than $15 for every $100 they borrow,
- cannot offer or sell any goods or services along with the payday loan,
- must allow the borrower, within two business days, to cancel a contract for a payday loan without paying any penalty or having to give a reason.
Effective July 1, 2018, a lender:
- cannot lend more than 50% of a borrower’s net income per loan
- must show the cost of borrowing a payday loan as an annual percentage rate in advertising or agreements
- the maximum fee that cheque cashing services can charge for government-issued cheques is the lesser of $2 plus 1% of the face value of the cheque, or $10
Interest rates – effective August 20, 2020
- the maximum interest rate that lenders can charge on the outstanding principal of a payday loan in default is of 2.5% per month (non-compounding)
- the maximum fee that may be charged for dishonoured (“bounced”) cheques or pre-authorized debits is of $25, and this fee may only be charged once, regardless of the number of times a payment instrument is dishonoured.
If a borrower has not met the terms of the contract, the lender:
- cannot contact a borrower more than 3 times a week, and
- cannot contact the borrowers spouse, family or friends, or use threatening language or excessive pressure.
How to get a payday loan
Loans can be found from online lenders or retail stores.
While most other loans usually require that a credit check be done first, it is not generally required to get a payday loan. Instead, the lender usually only requires that the borrower:
- have a chequing account,
- provide proof of address, and
- prove they have been working for at least 3 continuous months.
How much does it cost to get a payday loan?
Under the Act, the maximum amount that can be charged for a payday loan is $15 for every $100 loaned. For example, if $300 is borrowed for a two-week term, the fee for the loan would be $45.
How much can you borrow and how long do you have to pay it back?
The maximum amount a payday loan can be for is $1,500. In Ontario you have up to 62 days to pay back the loan before you are charged additional fees and interest.
Paying back a payday loan
Effective July 1, 2018 borrowers have different options regarding how they can repay a payday loan.
Borrowers who take out three loans within a 63-day period must be given the option to pay back their loan through an extended payment plan. Borrowers can:
- make prepayments at any time without any additional fee or penalty
- exit the extended payment plan at any time without any additional fee or penalty
Borrowers also have the option to pay back their loan in equal instalments over multiple pay periods. The amount that must be paid back per instalment will depend on how frequently the borrower is paid. For more information, visit ontario.ca.
What should you do before getting a payday loan?
Before taking out a payday loan, you should:
- make sure the lender has an Ontario license (Search the Ministry of Government and Consumer Services, Licensing, Inspections and Investigations Branch online database to confirm)
- know how much it costs to borrow the money,
- be sure you can repay the loan when it is due,
- know how much it will cost you if you can’t pay it back in time.
Can I make a complaint against a payday loan lender?
You can make a formal complaint to the government if you believe a payday lender has not followed the rules as set out in the law, such as operating without a licence or charging more than is allowed for the loan. Complaints can be made to the Ministry of Government and Consumer Services.
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