Rounding it up
Payday loans are a ridiculously expensive way to borrow money; they suck people into a cycle of debt, where they continuously borrow more money to pay off the previous debt.
Payday lenders have a predatory reputation for a reason and you should do everything you can to avoid them, like cashing in on your vacation days or opening a line of credit.
If you’ve exhausted alternative options, seek advice from reputable professionals like an accredited credit counsellor.
There’s never a bad time to start building up your slush fund; start saving early so you can prepare for emergencies and avoid payday lenders.
Ever been caught short between paycheques with an unexpected expense? Maybe your car needed urgent repairs or a surprise bill landed in your inbox. In these tight spots, short-term cash advances might seem like a quick fix—but they come with significant strings attached.
Across Canada, more people are reaching for these quick-money solutions during financial pinches. The appeal is understandable: minimal paperwork, no credit checks, and funds in your account often within hours. All you typically need is proof of regular income and a bank account.
However, this convenience comes at a steep price. These payday loans carry extraordinarily high interest rates and fees that can quickly transform a small advance into a major financial burden. What starts as a temporary solution can easily snowball into a cycle of borrowing that's tough to break.
In this guide, we'll break down how these high-cost lending options actually work, why they're so expensive, and the impact they can have on your long-term financial health. By understanding the true cost of quick cash advances, you'll be better equipped to consider alternatives that won't put your financial future at risk.
What is a Payday Loan in Canada and How Do They Work?
A payday loan in Canada is a short-term, high-cost borrowing option where you can typically get $100 to $1,500 with minimal requirements. These loans are designed to be repaid in a single payment on your next payday, usually within 14-30 days.
How Payday Loans Work in Canada:
1. Application Process: You apply either in-person at a physical location or online. The lender requires proof of:
Regular income
Bank account details
Valid ID
Canadian residency
2. Quick Approval: Lenders typically don't perform traditional credit checks, making approvals fast—often within hours or even minutes.
3. Loan Agreement: If approved, you sign an agreement specifying:
The loan amount
Repayment date
Fees and interest charges
Consequences for non-payment
4. Receiving Funds: Money is deposited directly into your bank account or provided as cash in-store.
5. Repayment: On your next payday, the lender:
Withdraws the full amount (including fees) from your bank account via pre-authorized debit
Or you repay in person with cash, cheque, or debit card
6. Costs: Payday loans are extremely expensive. In most provinces, lenders can charge up to $15-17 per $100 borrowed. This translates to an annual percentage rate (APR) of about 400-600%—far higher than credit cards or personal loans.
7. Provincial Regulations: Rules vary by province, with different maximum costs and borrowing limits. For example, in Ontario, lenders can't charge more than $15 per $100 borrowed, while in British Columbia, the limit is $17.
Alternatives to Payday Loans
Before turning to a high-cost payday loan, take a moment to explore these more wallet-friendly options. A little creative thinking could save you hundreds in fees and help keep your finances on track.
Consider these practical alternatives first:
Use KOHO Cover: If you're a KOHO user, Cover can cash advance you up to $250 before your next payday with no interest and minimal fees. It's designed specifically to help bridge small gaps without pushing you into expensive debt cycles.
Talk to your bill providers: Many companies offer payment extensions or flexible arrangements if you reach out before the due date. A simple phone call could buy you the time you need.
Use earned wages: Check if your employer offers advances on already-earned pay or if you can cash out unused vacation days for quick funds.
Tap into your support network: While it might feel uncomfortable, a short-term loan from family or friends typically comes without interest or fees.
Explore traditional banking options: Your existing financial relationship might offer solutions like:
A small personal loan or line of credit
A credit card cash advance (still expensive, but usually less than payday loans)
Overdraft protection on your chequing account
Ask about hardship programs: Many lenders offer payment deferrals during financial difficulties, including possible mortgage payment holidays or temporary credit card payment adjustments.
The key is to find options that give you breathing room without the steep costs that can make your financial situation worse in the long run.
The Reality of Payday Loans: What You're Getting Into
Taking out a payday loan might seem like a quick fix, but it's important to understand exactly what you're signing up for. Let's break down what happens from application to repayment so you can make an informed decision.
The Application Process
Payday lenders keep requirements minimal, but you'll typically need to provide:
Proof of steady income
An active bank account
A permanent address
Valid ID
Unlike traditional loans, your credit score usually isn't a factor, which is why these loans can be appealing if you have less-than-perfect credit.
Getting Your Cash
Once approved, you'll receive your funds in one of these ways:
Direct deposit to your bank account (most common)
Cash in-hand (at physical locations)
Prepaid card (though be careful—these often come with additional activation and usage fees)
The process is designed to be fast, with many lenders providing funds within hours or even minutes of approval.
The Repayment Reality
Here's where things get serious:
You'll typically need to repay the full amount plus fees on your next payday (usually within 14-30 days)
Most provinces prohibit loan rollovers or extensions, meaning the due date can't be pushed back in exchange for additional fees
You'll likely provide either:
Pre-authorized debit permission (allowing the lender to withdraw directly from your account)
A post-dated cheque for the full amount including all fees
Importantly, lenders cannot legally have you sign over your wages directly to them—this practice is prohibited across Canada.
The Fine Print Matters
Before signing, carefully review your loan agreement, which must include:
The exact amount you're borrowing
All fees and charges
The complete payment schedule
The final due date
If anything is unclear, ask questions. The consequences of misunderstanding can be costly.
Remember: payday loans are meant for short-term financial emergencies, not long-term financial solutions. The high fees can create a cycle that's difficult to escape if you're not prepared for repayment.
The Cost of Payday Loans
When you're in a financial pinch, the speed and convenience of payday loans can be tempting. But that quick cash comes with a steep price tag that many borrowers don't fully understand until they're caught in a cycle of debt.
The Price Tag Is Shocking
Payday loans are significantly more expensive than traditional borrowing options. In most regulated Canadian provinces, lenders can charge:
Up to $14 for every $100 borrowed (that's equivalent to an annual percentage rate of over 360% on a two-week loan!)
An additional $20 penalty if your payment bounces
In provinces without specific regulations, interest can legally go up to 35% (the criminal interest rate cap in Canada)
To put this in perspective: borrowing $300 for two weeks could cost you $42 in fees alone. That same amount on a credit card would typically cost less than $3 in interest.
When Repayment Goes Sideways
If you can't repay on time, things can quickly spiral:
You'll face additional interest charges on your outstanding balance
Your bank might charge NSF fees (typically $45-$48) if automatic payments bounce
Your growing debt may be sent to collections, damaging your credit score
The collection process can include frequent contact from debt collectors
In extreme cases, you could even face legal action
The Debt Trap Is Real
The high costs create a dangerous pattern: many borrowers end up taking new loans to pay off existing ones. Statistics show that over 50% of payday loan users borrow repeatedly throughout the year, often stuck in a cycle that's difficult to escape.
Know Your Provincial Protections
Each province has different rules governing payday loans. For example:
Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, and Saskatchewan all have specific payday lending regulations
Other regions follow the federal interest rate limit of 35%
If you're considering a payday loan, check your provincial consumer protection office to understand your specific rights.
Before signing on that dotted line, ask yourself: can you truly afford to pay back the loan plus all fees on your next payday? If there's any doubt, it's worth exploring the alternatives we've discussed instead.
Need a financial boost? KOHO's got your back!
Curious about smart ways to build credit while borrowing, or wondering how to make the most of your savings between expenses? Our resource hub is packed with practical advice that meets you where you are, whether you're taking your first steps toward financial confidence or looking to level up your money management skills.
And speaking of making your money work harder—have you checked out our high-interest savings account? It's the same straightforward KOHO experience you love, now helping your savings grow faster, no matter which province or territory you call home.