We are all about partnerships at Momentum. We know that we cannot do everything and that many of the people in our community have knowledge and expertise that we can learn from. It is in the spirit of learning from our community members that we present the following blog post from guest blogger Douglas Hoyes, Founder & Trustee of Hoyes, Michalos & Associates.
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Almost one in five people who file bankruptcy or a consumer proposal with our firm have a payday loan. When we talk to them they all know that payday loans are an expensive debt option, but at the time it seemed like the only choice they had to keep up with the bills. If you find yourself in need of cash to pay the rent or to buy groceries, with some planning ahead there are better and much cheaper options than taking out a payday loan. Here are 5 better choices:
Talk With Your Creditors
You might be embarrassed or perhaps you think they won’t give you extra time to pay, but the first option is to pick up the phone and call your creditors; explain your situation and negotiate a repayment plan. Unless you are way behind, most utility companies, and even landlords, would rather see a small payment now rather than receive nothing at all and will more than likely be willing to work out a plan with you to help you get caught up. You should even ask them to waive any late payment fees and ask that they not report your late payment on your credit report. Taking the initiative to call shows you want to pay what you owe and it never hurts to ask.
Get Overdraft Protection
This is where planning ahead helps. If finances are going to be tight for a while, talk to your bank and apply for overdraft protection on your chequing account. Even though you will be charged interest, it is usually less than the cost of bounced payments, and the rate will be way less than that of a payday loan.
Dip Into Your Savings
If you have some savings put away in a savings account, now might be the time to use it. If you need a large amount and getting that money now will solve the cash flow problem for good, then you might even want to consider taking money out of your RRSP. This is not something to be considered every time you need money, but if for example you need a thousand dollars to repair your car, it may be better to cash in some investments than to get caught in the payday loan cycle. Don’t forget that you will have some tax implications if you use your RRSP, so plan for that too.
If you have to borrow money, talk to your bank, a local credit union, even family and friends. Taking out a small loan from a local credit union is usually a much better option than a revolving payday loan. Sit down with whomever you borrow money from and make a repayment plan so you don’t turn your short term problem into a long term issue. If you have bad credit and your family can’t loan you the money, ask if they can co-sign a small loan for you. Again, make sure you keep up with the payments or your family member will be on the hook for what you haven’t paid back.
If Need Be, Use A Credit Card
We don’t like recommending people pay ongoing living expenses with a credit card or that you regularly take out a cash advance from a credit card, but it is a better option than using a payday loan. If you do have to use your credit card, make sure you pay the balance off as fast as you can.
All of the above are better ways to deal with a short-term need for cash. Payday loans seem cheap based on the way that they are structured because you think you are only borrowing the money for a week or two, but the actual cost is usually the equivalent of 300% a year. All of the above choices are much cheaper and if you only need the money for a few weeks, they are a better option. If you find yourself constantly short of cash and considering payday loans then you need to consider some longer term solutions. Talk with a credit counsellor about making a budget. If other debts are the problem, talk with a bankruptcy trustee about how to deal with those debts. Whatever you decide to do, avoid payday loans as they usually lead to a cash flow cycle you can’t beat.
About the Author
Doug Hoyes has extensive experience resolving financial issues for Canadian citizens. A Licensed Bankruptcy Trustee and co-founder of Hoyes, Michalos & Associates, he is also a Chartered Professional Accountant (CPA), Chartered Insolvency and Restructuring Professional and Business Valuator. He regularly comments on a variety of TV, radio and other media outlets on topics surrounding bankruptcy and writes a column for the Huffington Post. Hoyes has been a Licensed Trustee since 1995 and has testified before the Canadian Senate’s Banking, Trade and Commerce Committee in 2008.