A loan till payday may bankrupt you

If you decide to use one of these payday advance companies which have popped up everywhere across Canada – be very careful and read the fine print. Some are much easier to deal with than others when you find you cannot repay.

“Sharon” has worked the last five years as an executive assistant for a printing business. About 10 months ago, she found herself in a financial mess after her car broke down and she had no money to get it fixed. Sharon decided, rather than waiting until her next payday two weeks away and using the bus, she would get an advance on her next pay cheque – payday loan, but not from her employer. That move would prove to be a very costly mistake.

Sharon saw an advertisement for a payday loan company, and applied for a $500 advance against her next pay cheque. However, when it came time to pay it back, 14 days later, she owed more than $600. She could not afford to repay the total amount in one lump sum and still meet her daily expenses, so she went to another payday loan company, and borrowed again. Before she knew it, she had taken out loans at four different companies, each time using the new money to try to pay back the previous loans. All the while, she was going deeper into debt, thanks to their outrageous interest charges and fees.

Interest on these pay advance loans can be as high as 59% on an annual basis. Add in, for some companies, stiff brokerage fees, write costs, cheque-cashing fees, and an item fee, and the cost of these loans can be out of this world.

In total, Sharon now owes almost $2,000, plus she is getting phone calls at work and at home from the payday loans collection departments wanting their money. Sharon’s boss approached her and told her that he had received a letter instructing Sharon’s next pay cheque was to be sent to a payday advance company. The amount owed, the letter stated, was $725, which represented almost an entire pay cheque for Susan and this was just for one company.

Sharon was in tears the day she called Solutions Credit Counselling Service Inc. for help and spoke to me on the phone. 

Sharon said she signed agreements at all four payday loan companies, giving them permission to go after her wages, should she not make the payments as agreed. What Sharon didn’t know until she called my office is that the assignment of her wages could be cancelled and that the pay advance company could not go after her wages, unless they sued her and obtained a judgment granted under a court order. 

Once a creditor has obtained a judgment, that creditor may apply through the courts to garnish wages, and in most cases a maximum of 20% of net wages is what can be garnished. That amount is subject to change if it entails support or maintenance payments.

The first thing I did for Sharon was to cancel the wage assignment that each company claimed to have on her pay cheque. This is done in writing by giving a copy of the cancellation to her employer and to the payday advance company. This does not cancel the debt; it merely stops the payday advance company from getting at her pay cheque. If you are considering taking care of this yourself, make sure you give a copy of the cancellation to your employer. I suggest faxing the cancellation of wage assignment directly to the payday advance company and keeping a receipt to prove it was received.

I then had Sharon put stop payments at her bank on the cheques she had issued to the payday advance companies, including cheques that had been returned marked “NSF” for “non-sufficient funds.” I did this so the payday advance companies could not reclear the cheques for payment at the bank. Three of Sharon’s creditors called our office to get more details and agreed in writing to accept a Debt Management Program from our company. They accepted monthly payments and stopped the interest charges.

However, one payday advance company would not even discuss any form of repayment other than payment in full. This payday advance company kept calling her at work and at home, then started calling her employer refusing to stop even when told to do so by the employer. This is a violation of the Debt Collection Act and should be reported to the government office in your area.

I tried writing to the president of that company only to receive a nasty call from the collections manager telling me I that I had to deal with him and that “I had better not write to the president again.”

If the company threatens to sue you, that is not such a negative thing. The court will then make these companies deal with you in a professional manner and they will accept a repayment program as ordered by the courts. In my experience, the courts tend to refuse to grant interest or costs and only the original amount of the debt is awarded.

It surprises me that a company, which advertises widely how they are here to help people, is trying to put them under. More and more clients coming to us are having hardships because of payday advance companies.

In Sharon’s case, personal bankruptcy can be averted because she owes no other debt. In fact, Sharon would have been much better off using a credit card or a personal line of credit to help her through her tough times. Even retail credit cards, at 28.8%, are much cheaper than payday advance loans.

Most creditors are happy to work with credit counsellors and will agree to a suitable repayment plans. Often interest and late-payment fees will be waived.

In the United States, after a groundswell of consumer complaints, the payday advance industry was hit with a new set of federal rules, including no longer being allowed to "pursue or even threaten criminal action if a customer's account is not paid." As well, there must be full disclosure of the cost of borrowing, including publishing the total annual rate.

I am sure it is only a matter of time until we have a new set of rules to deal with the Canadian payday advance industry.