Around 2 million Canadians use payday loans annually. There are over 1,400 payday outlets in Canada – either as storefronts or online. What is the difference between a payday loan and other personal loan products?
At first glance, one lender can appear to be quite similar to another. But there are a number of key differences between payday lenders and other mainstream financial institutions you should know. Clearer information leads to better decisions for customers.
How is a payday loan different from other loans available on the market? The hint is in the name. They are very short-term loans for amounts usually under $1,500 that you repay in full from your next paycheck. The fees charged make them a very expensive way to borrow, with annual rates that can exceed 500%!
As a prime online lender for Canadians with good credit, Borrowell offers a different type of lending product and customer experience. Here are some of the key differences between a payday loan and a Borrowell personal loan.1. Loan Amount
The maximum you can borrow on a payday loan varies between lenders and from province to province. Some lend up to $400, others up to $1,500. Because they are meant to be repaid from a pay cheque, they are relatively small amounts.
In contrast, Borrowell loans range from $1,000 to $35,000. Borrowers with Borrowell can use their loans for any purpose, but typically they are for larger life expenses (e.g. paying off credit cards or a home reno).2. Loan Term
Payday loans typically only last for a few weeks, until your next payday. There is one payment at the end of the term, covering the original principal and interest.
Borrowell offers loans for terms of either 3 or 5 years, which are designed to be repaid with fixed monthly payments that are judged to be affordable based on your income and expenses. Our loans are fully amortizing, which means each fixed monthly payment pays back some principal and interest. Your loan is fully paid off by the end of the term. 3. Interest Rate
This is where the real shock of payday lending comes through. In Canada, it is illegal for lenders to charge an annual rate of interest above 60%. Payday lenders, however, have exemptions in most provinces that allows them to charge much higher rates. In Ontario, payday lenders can charge $21 for borrowing $100 over a two week period. If you borrowed $300 with a fee of $63, and paid that back in two weeks’ time, you would have paid 546% as an annual percentage rate (APR)!
Borrowell’s loans start at 5.6% APR, which is comparable to the rates a bank would offer on a personal loan, and also lower than the 19.9% or 29.9% APR that credit cards and store credit cards charge. More importantly, your interest rate is customized to you. The better your credit history, the better your rate. Welcome to 2015.4. Approval Process
Payday lenders are not concerned with your overall financial health, or what your circumstances will be 6 months or a year down the line. For them the only metric is whether you will have enough money coming in this month to repay your loan.
Borrowell’s process takes into account a number of factors. To do that, we need to check your consumer credit file, but in a way that doesn’t affect your credit score. We assess multiple data points and use our unique underwriting model to try to understand how much we can lend you, at what interest rate, and what your monthly payments would be.Promoting responsible lending
It’s clear that a payday loan and a Borrowell loan are very different financial products designed for different purposes. Payday loans are very expensive short term solutions. Unfortunately, it is often people in financial distress that do not have any other options and who get stuck in a vicious cycle of payday loans.
The Financial Consumer Protection Agency of Canada has a helpful guide providing more information on the risks of payday loans and possible alternatives, including credit counselling (click here for more information).
Borrowell is educating Canadians on good personal finance habits and promoting financial responsibility. Sustainable lending is fundamental to our company ethos and business model. We want to bring a great customer experience to responsible lending through our services. Borrowell succeeds when it’s customers succeed — not when they get deeper into debt.
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