2 types of loans to avoid
Payday loans
If you need money for an emergency or you’re looking to reduce the cost of your current debt, but your poor credit score limits your ability to consolidate your existing debt or take out a new loan, you might consider a payday loan. Payday lenders will offer loans at the absolute highest allowable effective interest rate legally permitted by each province.
For borrowers drawn to payday loans because of the convenience, be aware: The cost of payday loans is exorbitant and in almost all circumstances, it’s a good idea to try and find a cheaper alternative. To appreciate the cost of using a payday loan, consider the following where the cost of a payday loan is compared to the cost of a credit card cash advance:
| Loan | Term | Cost | |
|---|---|---|---|
| Payday Loan | $300 | 14 Days | $63 |
| Credit Card Cash Advance | $300 | 14 Days | $8 ($3 Interest + $5 fees) |
As illustrated, the payday loan that charged 24% APRcost nearly eight times more than the cash advance loan.
Worse, is that some lenders consider the use of payday loans to be a flag and a reason to reject you for future, less expensive, loans in the future — even if you paid it back on time.
Bottom line: Avoid payday loans and only use them as an absolute last resort.
High-interest lines of credit (LOCs)
A line of credit — or LOC — can be a very convenient borrowing method, as it allows you to borrow and repay funds, repeatedly, up to a predetermined limit. You can find lines of credit offered through banks and credit unions, although these loans are typically only available to borrowers with fair to excellent credit.
For borrowers with poor to fair credit scores, investigate LOCs offered by online banks or digital lenders who specialize in bad credit loans or the subprime borrower market. Unfortunately, the rates on these loans can be very high with some APRs reaching 45% or more.
Bottom line: Do LOCs with high APRs beat the interest rates charged on credit cards? No. For that reason, it pays to shop around to find the lowest interest rate.
4 alternatives to explore
Cash advance hacks
If you need access to cash quickly, consider taking out a credit card cash advance using a credit card with low-interest cash advance rates.
While a standard cash advance will typically charge a flat fee of around $5, plus interest of around 24% from the time of withdrawal, today there are some select credit cards that offer low-interest cash advances with rates between 10% to 13%.
You can further reduce your interest costs with a simple cash advance hack:
- Step 1: Take out a cash advance
- Step 2: Transfer that cash to another credit card via a low-interest balance transfer offer.
Some balance transfer cards even offer balance transfer promotions at 0% interest, albeit only for a promotional period between 6 to 12 months. Nonetheless, this might be the overall cheapest means of borrowing in Canada today.
Low-interest loans
You’ll be hard-pressed to find same-day loans with interest rates comparable to low-interest cash advances or balance transfers, but reputable same-day lenders will still charge less than payday lenders, particularly to borrowers with good credit scores.
If you can afford to wait a little longer to receive funds (say, a few days rather than 24 hours), it’s probably worthwhile to take out a regular, low-interest personal loan rather than a same-day loan.
To help, you can compare your options using a loan consolidator. Here are two good options:
Loans Canada
Submit a single application and let Loans Canada do the research for you and find a lender that suits your needs and your eligibility with rates between 1.99% to 46.96%. No need to call around or affect your credit score when you have one, simple application.
LoanConnect
The only requirements for getting a loan with LoanConnect are that applicants are Canadian citizens. LoanConnect term lengths typically range between 3 to 120 months.
Chequing account overdraft
If you don’t have a credit card or if a low credit score makes it infeasible to take out a loan, you could go into overdraft with your chequing account. Some of Canada’s best chequing accounts offer overdraft protection for around $5per month, with maximum overdraft amounts usually between $2,500 to $5,000.
Though this is a viable solution when you’re in a pinch, keep in mind that the interest rates a chequing account charges on overdrawn funds are typically higher than those charged with loans and credit cards.
Dig into savings and investments
We’re all justifiably reluctant to liquidate investments, withdraw from our savings accounts or dip into our emergency funds. But no matter how strong a given investment might be performing or how high a savings account’s interest rate might be, it’s likely earning at a slower pace than most forms of debt will accumulate. In other words,you’ll probably lose less money if you tap into your assets than you will if you take out a loan, cash advance or charge an expense to a credit card.
Just be aware that you may be charged fees for withdrawing from investments or savings accounts (particularly registered accounts), so crunch the numbers first to be absolutely certain that the combined amount you’ll lose in earned interest plus the fees are still less than the debt you’d rack up from other borrowing methods.
More: Do you have an emergency fund? It’s easier to set up than you think
Bottom line
While it should go without saying, sometimes it needs to be said: If the cash you’re looking for is not for a true emergency, and you don’t have access to a credit card or overdraft protection, consider passing on the purchase completely. It’s a bummer if your car breaks down and you don’t immediately have the cash to get it fixed. Still, the inconvenience of taking public transit for a while pales compared to the long-term ramifications of spiralling debt.
That said, there are rare circumstances in which you do need money immediately — for example, your car breaks down, and, as an Uber driver, you absolutely must have wheels to earn a living. Then and only then might a payday loan or high-interest LOC be a reasonable borrowing method, but only after all other viable avenues have been exhausted.
Sources
1. Government of Canada: Criminal Interest Rate Regulations: SOR/2024-114 (May 31, 2024)
