“Need Cash? Borrow up to $1,500. Fast!” is what a typical Payday Loan Company advertises, but at what cost and are there any alternatives out there?
Usually when we’re in a bind, we will borrow money from anywhere we can get it. Even when we’re in a bind, there are cheaper options—be sure to look into them all. Three great alternatives to a pay day loans are available through banks or credit unions. They include:
- A low fee credit card
- Overdraft protection from your bank or credit union
- A line of credit
A low-interest credit card usually has an interest rate of about 12% and an annual fee from $20 to $29. This type of credit can be a good option for those that don’t qualify for a line of credit or overdraft because you can borrow against the card in the form of a cash advance and you’re still borrowing at 12%. However, with a cash advance on a credit card, there is no grace free period—you start accruing interest charges the moment you access the money. So if you ran into a problem and needed $500 but could pay it off after 10 days when you receive your paycheque, the total cost of accessing that cash advance would have been the one time annual fee (usually between $20 and $29) plus the interest. See the table below for a comparison between credit options.
Overdraft is like a safety net attached to your chequing account, Overdraft is a set limit that your bank lends you through your account that will cover bills or withdrawals you make on the account. Overdraft typically has an interest rate of 19.99% and a small fee, usually around $5.
With a line of credit, you get the lowest interest rate possible and don’t have to pay any annual fees, but qualifying for a line of credit may be more difficult than a low fee credit card or overdraft protection.
In order to access any of the above, you need to have a credit score already established and be in good standing with a source of income to show that you have the ability to repay your what you borrow. If you are turned down for any of the above, ask your bank or credit union to explain what you need to do to in order to be able to access those types of credit. This will give you a plan for building your credit score.
Below is a table of the cost of borrowing $500 for 10 days from using a payday lender compared to having your own credit product through a bank or credit union:
|Money Mart||Low Fee Credit Card||Overdraft Protection||Line of Credit|
|Cost of Borrowing $500||$23.00 per $100 borrowed||One time annual fee plus interest||$5.00 fee plus interest||Interest only|
|Cost calculations||$23.00 x (500/100) = $115||(12% / 365 days) x 10 days borrowed x $500 = $1.64 interest plus annual fee of $20 – 29||(19.99% / 365 days) x 10 days borrowed x $500 = $2.78 interest + $5 fee = $7.78||(8% /365 days) x 10 days borrowed x $500 = $1.10|
|Total cost||= $115.00||=$30.64||$7.78||$1.10|