Understanding the real cost of a payday loan
Payday loan costs are usually quoted in dollars per $100 borrowed. The legal maximum is $14. That sounds modest, and for a single two-week loan it's $70 on $500. The trouble comes from how fast it compounds when loans repeat.
The annual percentage rate (APR) shows the cost as if you borrowed for a full year. A $14 fee on a 14-day loan equals about 365% APR. For comparison, most credit cards charge around 20% to 30%, and a credit union personal loan is usually lower. APR is the best single number for comparing borrowing options side by side.
Quick math: take a $500 payday loan every two weeks for three months and you'd pay about $420 in fees, while still owing the original $500.
Plan your repayment before you borrow
The single most useful thing you can do is check that your next paycheque covers the repayment and your essential bills. Write down:
- Your next net pay amount
- Rent or mortgage, utilities, phone, transportation and groceries until the following payday
- Any other debt payments due in that period
- The full loan repayment
If the total is more than your pay, a payday loan will likely leave you short again in two weeks. Borrow less, or look at the alternatives below.
How to avoid the payday loan cycle
The cycle starts when repaying one loan leaves you short, so you take another. To break it:
- Borrow only for a one-time emergency, never for regular bills
- Don't hold more than one payday loan at a time
- Ask your lender about an extended payment plan if you're struggling
- Build a small emergency fund, even $10 a week, so the next surprise costs less
- Speak with a non-profit credit counsellor if you've borrowed three or more times in a few months
Alternatives to payday loans
| Option | Typical cost | Good for |
|---|---|---|
| Credit union small loan | Much lower than a payday loan | Members with a few days to wait |
| Employer pay advance | Often free | People with a supportive employer |
| Overdraft protection | Interest plus a monthly or per-use fee | Small, very short shortfalls |
| Credit card cash advance | Around 20% to 30% APR plus a fee | People with available credit |
| Bill payment extension | Usually free or a small late fee | Utility, phone or rent due dates |
| Non-profit credit counselling | Free advice | Anyone with repeated borrowing |
Non-profit credit counselling agencies can review your budget, negotiate with creditors and, if needed, set up a debt management plan. Look for an agency that belongs to Credit Counselling Canada.
How to spot loan scams
- Upfront fees: a "processing" or "insurance" fee before you get the loan is the most common scam.
- Guaranteed approval: licensed lenders must check that you can repay.
- Unusual payment methods: gift cards, cryptocurrency or wire transfers.
- No licence number: every legitimate payday lender is licensed provincially.
Report suspected fraud to the Canadian Anti-Fraud Centre.
Know your rights as a payday loan borrower
- A maximum cost of $14 per $100 borrowed, including all fees
- A loan of no more than $1,500 and no longer than 62 days
- A written agreement showing the total cost, APR and due date
- A short cancellation period after signing
- A dishonoured payment fee of no more than $20
- No required insurance and no upfront fees
Provinces add their own protections on top of these. See our responsible lending page and the FCAC's payday loan guide for more.