When an unexpected expense arrives, a payday loan may appear to be a convenient way to access money quickly. Applications can often be completed online or at a physical lending location, and payday loans are designed specifically for short-term borrowing. However, Ontario consumers should understand the costs and repayment requirements before signing an agreement.
The first question to ask is how much the loan will actually cost. Ontario currently caps the cost of borrowing for payday loans at $14 per $100 borrowed. For instance, a $500 payday loan could have a maximum borrowing cost of $70, meaning the borrower could be required to repay $570 under the basic loan terms.
The repayment date is equally important. Payday loans are generally intended to be repaid over a short period, often around the borrower’s next payday. Before accepting a loan, consumers should consider whether their regular income will cover both the loan repayment and their normal expenses such as rent, utilities, groceries and transportation.
It is also worth comparing alternatives. Ontario’s consumer guidance specifically recommends considering other sources of borrowing, such as family or friends, a bank or credit union, or available credit, before taking a payday loan. Different types of credit have different costs and repayment structures, so comparing the total cost rather than simply looking at how quickly money can be obtained is useful.
Consumers should also check that the lender is licensed. Ontario requires payday lenders and payday-loan brokers to be licensed. When applying online, borrowers should look for information confirming that the lender is authorized to operate in the province. Ontario also warns consumers about websites that act as lead generators and collect personal information before passing it to a payday lender.
Reading the agreement before accepting the loan is another important step. The agreement should clearly identify the amount borrowed and the cost of borrowing. Ontario requires payday-loan agreements to provide specific information to borrowers, including cost information and applicable rights.
Borrowers should also understand what happens if a payment is missed. Ontario has rules limiting certain fees associated with dishonoured payments. Since January 1, 2025, the maximum fee that a payday lender can charge for a dishonoured payment is $20, subject to the applicable rules.
Finally, remember that Ontario provides a cancellation period. A borrower can generally cancel a payday-loan agreement within two business days without giving a reason or paying a cancellation penalty.
A payday loan may solve an immediate cash-flow problem, but the decision should be based on the complete cost and the ability to repay. Taking a few minutes to compare alternatives, review the agreement and confirm the lender’s licence can help consumers understand what they are agreeing to before borrowing.
