1. The Ontario Payday Loan Act limits the amount an individual may be charged to $15 per $100 borrowed for a two-week period. Calculate the cost of the loan and the annual percentage rate of charge (APR).

2. What is the cost of borrowing $300 for 14 days at a rate of $21 per $100 borrowed, and how much must be paid back on the due date? Calculate the APR.

3. Payday loans are the most expensive form of consumer loan. Before getting a payday loan, you should consider other ways to borrow money. List some possible alternatives.

What is a payday loan and why do people choose a payday loan? A payday loan is an unsecured loan for a small sum, typically a few hundred dollars, to be repaid after a short period of time—usually no more than two weeks.

Sometimes consumers, even those with steady incomes, find themselves short on cash and can’t wait until their next payday. Used responsibly, a small payday loan can be a useful way to finance an emergency shortage of funds due to an unexpected bill or repair. Before obtaining a payday loan, however, you should consider whether a payday loan is a sensible choice that meets your particular financial needs and situation.

How does it work? Payday loans are meant for occasional and unusual use only. Applicants must be at least 18, have a bank account, and prove they have a steady job. Once approved, the funds are either electronically deposited into your bank account or may be picked up at a store location. Your payment is scheduled to be due on your next pay date following the origination of the loan, giving this type of loan its name. Loans must be paid in full on the due date; they cannot be refinanced or rolled over. The payment is withdrawn from your chequing account electronically, so make sure you have enough funds in your account on the due date so that you do not incur any non-sufficient funds (NSF) fees.

How much will it cost you? Payday loans are very high-cost loans. Under the current rules, Nova Scotia lenders can charge fees of up to $25 for every $100 borrowed—the highest rate in the country. By comparison, lenders in British Columbia can charge a maximum fee of $17 per $100. In Ontario, the maximum allowable cost of borrowing is $15 per $100 borrowed (including all fees and charges), which is the lowest in the country.

Like banks, payday loan lenders are required to disclose the “cost” of borrowing in some standardized way as a form of consumer protection. To a consumer who is not trained in the mathematics of finance, equivalent rates can be confusing. The term annual percentage rate of charge (APR) describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on the loan. The APR is intended to make it easier to compare lenders and loan options. 

The effective APR has been called the “mathematically true” interest rate for each year. For instance, the APR on a $300 payday loan for 14 days is a whopping 599.64% (annualized) on a rate of $23.00 per $100.00 borrowed. This means that if your loan was outstanding for a full year, you would pay 6 times the amount you originally borrowed. Note that this amount does not include possible compounding and any latepayment fees!