Should I take out a payday loan?

With APRs over 300%, taking out a payday loan is one of the most expensive ways to borrow money. But when you’ve run out of options, this type of loan can help you stay afloat.

When should I avoid payday loans?

Generally, you might want to stay away from payday loans in the following situations:

• You have time to qualify for a less expensive alternative. The main advantage of payday loans is that they’re fast and available to borrowers with less-than-perfect credit. But there are payday loan alternatives that are significantly cheaper and come with fewer risks.
• You have ongoing financial problems. A payday loan is a short-term solution to temporary problems. If you have ongoing financial difficulty, consider talking to a credit counsellor who can walk you through your other options instead.
• You won’t have enough income after repaying your payday loan. If you know you’ll be short on income to pay for other debts and expenses, avoid a payday loan as it can trap you in a cycle of debt.
• You need more than $1,500. Payday loans max out at $1,500. If you need to borrow more, this isn’t the right type of loan for you.
• You don’t think you can pay it back. If you don’t repay your payday loan, you’ll be charged NSF and late fees. The payday lender can also send your debt to collections.

When should I consider a payday loan?

A payday loan is designed to help you in an emergency. If you’re certain you will have the funds to repay a payday loan within a short period of time, it might be useful in the following situations:

• You need money in an hour or two. Payday loans are one of the fastest loans you can get — especially if you don’t have perfect credit, a car to use for collateral or need money on the weekend. If you need money fast outside standard business hours, you can apply to e-Transfer payday loans 24/7.
• You have poor credit. Payday lenders are lenient with their requirements, and some lenders don’t even do credit checks. Oftentimes, a payday loan may be the only financing option that people with bad credit can qualify for.
• You don’t have a salary. A payday loan might be one of the few options out there if you rely on alternative sources of income, such as government benefits, a pension or alimony.

Related: Best payday loans in Canada

Payday loans vs. overdrafting your account

Overdraft protection is a service offered by banks. An overdraft occurs when there isn’t enough money in your bank account for a transaction, but your bank allows the transaction to go through anyway for a fee. Overdrafting your account can be the closest alternative to taking out a payday loan — you can get the money instantly. However, overdraft protection may be subject to credit approval.

What are other alternatives to payday loans?

• Installment loans. These are a type of personal loan offered by online lenders. They tend to have smaller loan amounts, shorter terms and higher interest rates than the average personal loan. They also have easier requirements. Learn more about the best installment loans.
• Pay advance apps. This is also offered by online lenders. Borrow a small amount and repay by your next payday.
• Bad credit personal loans. Also offered by online lenders, a bad credit personal loan is available to borrowers with a credit score below 560. Learn more about the best bad credit loans.
• Visit 211.ca. If you’re experiencing a long-term financial setback, look into government and community resources available to residents of your province.

Bottom line

A payday loan can help in an emergency when you have exhausted all your other options. But you might want to look into your cheaper alternatives first to avoid getting caught in a cycle of debt.

You can learn more about how these loans work by reading our guide to payday loans.

Frequently asked questions

• Can I get a payday loan to improve my credit?

  No — most payday lenders don't report on-time repayments to the major credit bureaus, so they're not a good option to build your credit. However, these types of lenders do report missed payments, which will hurt your credit.

• Can I cancel a payday loan?

  Check the payday loan regulations of your province as they can differ among provinces. In BC for example, you have up to two business days to cancel your payday loan.