Payday Alternative Loans Explained

Introduction

Borrowing money from institutional lenders such as banks can often be a lengthy process. This gets further exacerbated if the borrower in question has a poor credit score (generally defined as below 650). However, there are times in life when urgent liquidity i.e. cash is the need of the hour. It is for these instances that debt instruments such as payday loans for bad credit were invented to help borrowers with poor credit gain access to quick financing. In recent times though, payday loans have been associated with a negative reputation owing to the predatory practices of some lenders that purvey such services. In this article, we look at payday loan alternatives for bad credit.

What is a payday loan?

Payday loans are very (“very” in caps) short-term loans designed for people who need cash in a hurry. The duration of these loans can be anything from a couple days to a few weeks, wherein the borrower repays the loan when the next paycheck hits their bank account. Because of the quick and often emergency nature of these loans, the application process is simple and can take only a few minutes to complete. However, care and diligence should be applied when obtaining these loans as they can have outsized annual percentage rates (APRs) that can potentially be expensive and even unaffordable for the borrower.

What is a payday alternative loan?

As the name would suggest, these are alternatives to payday loans for clients with bad credit. These loans are offered by alternative lenders such as credit unions or other specialist financial institutions and are granted in smaller amounts than traditional payday loans. While maximum individual amounts extended vary from lender to lender, it is not uncommon for payday alternative lenders to set a cap at as little as $1000 (as compared to a payday loan cap of $1500 as stipulated by the Government of Canada). But what these loans lack in size, they make up for in affordability as the cost of borrowing these loans can be substantially cheaper than the payday loan counterparts. For customers with bad credit, this can therefore be a viable solution to avoid being stuck in a vicious debt cycle.

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Recent Events

After public support of greater consumer protection from payday lenders, provincial governments across Canada stepped into action for the same. In May 2016, the Province of Alberta announced Bill 15, which reduced maximum payday lending fees from $23 to $15 per $100 borrowed. The government also announced that they had partnered with credit union representatives to offer alternatives for payday loans that aimed to improve the welfare and financial conditions of prospective borrowers. Furthermore, these credit unions would even offer financial literacy resources and other supporting materials to improve borrower knowledge of consumer finance.

Major Differences

Given the increased regulatory scrutiny on the payday lending industry, there are quite a few fundamental differences between payday lending and payday alternative lending despite their purposes being largely similar. While both are tools to gain immediate cash that would be repaid on a short timeline, the differences are as follows:

1. Who offers them: As mentioned above, the payday alternative lending industry in Canada is still in its nascence. However, select credit unions across the country have expressed the availability of payday alternative loans or their interest in providing such a product in the near future. The easiest way to know whether a credit union offers this type of product is to give them a call and ask. On the other hand, payday loans can be offered at storefronts or online.
2. How to qualify: Payday loans are generally easier to qualify for as lenders are mainly concerned with the presence of a valid bank account as well as supporting documentation such as age and proof of income. On the other hand, payday alternatives have a little bit of a longer process wherein they check credit history and verify the proof of income prior to extending the loan.
3. Fees and other considerations: Payday loans generally offer higher interest rates while payday alternative loans have lower borrowing costs as they are based on an analysis of the consumer’s credit history. The payday alternative loans also offer the additional advantage of longer repayment timelines while payday loans need to be paid back within two to four weeks.
4. Rollover: The traditional payday loan structure enables borrowers to rollover the loan into a new loan if they cannot afford to make the full payment by the time their net paycheck arrives. While the equivalent statistics for Canada are not published, a study conducted by the Consumer Financial Protection Bureau in the USA discovered that 70% of people take out a second payday loan within a month of their first one. This sets a dangerous precedent as with each rollover, borrowers accumulate greater fees and interest charges, which then puts them behind on debt repayments over and over. This concept is known as the debt cycle referred to earlier in this article.

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How to apply for payday alternative loans online

To this day, payday loans can be offered both at storefronts in specific convenience stores and/or online. Payday alternative loans, as mentioned earlier, are generally provided by slightly more established, formal institutions and/or are available online as well. When applying online, the system will ask for key pieces of information such as age, social insurance number and/or other identification documentation that is used to validate the borrower and his/her debt capacity. Once the lending parameters are established, the system will output terms and conditions, which will include items such as the interest rate, duration, and repayment conditions. If the borrower is satisfied with these rates and terms and conditions, he/she can then select the loan and the funds are deposited into the bank account provided within a few hours to a business day.

Advantages of using Alternative to Payday Loans in Canada

Given the volume of information mentioned above, it is perhaps useful to distill the key benefits of using payday alternative loans as opposed to regular payday loans when seeking quick cash. While there may be some individual benefits or “kickers” offered by individual institutions to entice clients, at a general level, the benefits are as follows:

1. Low interest (comparatively!): Everything is relative. While the payday alternative loans are still not the cheapest form of personal loan financing, they are substantially cheaper than payday loans, which can often run into high double digit APRs.
2. Fees: One of the other aspects of predatory lending practices other than the higher rates charged include the addition of fees. In some cases, these fees can rack up into the hundreds of dollars for matters such as “administrative charges”, which refers to the labour required to deposit and withdraw cash into the borrower’s account. With payday alternative loans, these fees are generally lower and priced more in-line with the actual cost of such charges that the institution incurs when processing the loan.
3. Repayment timeline: Payday alternative loans allow their borrowers to repay the loan over a longer period than payday loans, which typically require repayment within a couple weeks i.e. when the next paycheck is earned by the borrower. This enables the borrower to have smaller cash outflows on a periodic basis, which can then be applied to “smooth out” their expenditures and ensure that have funds left over to pursue other day-to-day expenses. In contrast, payday loans have larger cash outflows, which leads borrowers to have to rollover the debt as they are left with little in disposable income after paying back the payday loan.
4. Clear contracts: Because the payday alternative market is regulated more than the payday lending market, contracts are more transparent for borrowers. This enables the borrowers to make informed choices as compared to payday lenders, which can sometimes be confusing to a novice reader. However, caution and diligence should still be applied when reading contracts of any nature prior to signing.
5. Self-imposed limitations: While payday lenders permit rollovers to occur, payday alternative loans do not permit rollovers. To take out a second loan, the first loan has to be paid off in full. This avoids the temptation of using one loan to pay back another and ensures that the customer does not get trapped into a spiralling debt condition, wherein they are struggling to even pay the interest on the principal amounts.
6. Digital Process: The advent of Internet has meant that there are payday loan alternatives online that can be availed from the comfort of your home. Within minutes, the application can be completed and funds can be received in as little as a couple hours.

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Disadvantages of using Alternative to Payday Loans in Canada

Despite the advantages mentioned above, there are some downsides to using payday alternative loans too, especially when compared to their payday lending counterparts. These tend to be more related to their accessibility though than the financial considerations. Some drawbacks include:

1. Not common… just yet: Payday alternative loans are still a comparatively new market meaning that there aren’t too many institutions offering the product at the current moment. On the other hand, payday lenders have been prevalent for years and are easily found even when simply walking out on the street.
2. Credit check: Payday alternative lenders perform credit checks and verify credit histories prior to extending a loan. Although the option is still open to customers with poor or minimal credit histories, this is in contrast to some payday lenders, which advance the loan without credit checks.
3. Timing: Most people that take out short-term loans of this nature require cash for immediate purposes. Because of the verification process that borrowers have to undertake with payday alternative loans, these loans are extended on a slightly slower timeline than payday loans.

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Frequently Asked Questions

Is your loan the best payday loan alternative?

Although Magical Credit is not a “Payday Alternative Lender”, it is, in fact, a great alternative to payday loans. Magical Credit is specialized in Bad Credit Loans, which means we look past your Credit Score and take into account your overall Credit History to qualify you for one of our loans. Not only that, but we offer flexible payment terms and we accept various types of income.

My credit history is bad. Can I still apply?

Yes, clients may apply even with a sub-optimal credit score and history. While we cannot guarantee that the loan will be extended, there are other benefits involved. We report to the credit bureaus on a periodic basis, so if you have availed our loan and maintained a positive payment history, you can repair this credit score over time.

My credit history is almost non-existent. Can I still apply?

Yes, clients may apply even with smaller credit histories. For these clients, we offer Starter loans, which is an initial advance of $500 to help them start building their credit. Once these loans are paid back in full, clients qualify for increases.