Payday loans are short-term, high-interest loans best used for emergencies, and you will have to pay the lender back on your next payday. They are quite common, with around two million Canadians using them yearly. However, payday loan agreements can be challenging to understand. This is mainly due to their complex legal jargon. Fortunately, we will explore some key terms that you must know to make well-informed decisions regarding payday loans:

1.   APR (Annual Percentage Rate)

APR is the yearly interest you pay on a loan. It also includes any additional fees for borrowing. This is simple enough, but the figure can be misleading in payday loans. Remember that these loans are short-term. Since APR is for a year, the amount will be higher. The loan will seem more expensive than it actually is, so you won’t be able to evaluate the costs accurately.

It’s important not to judge a payday loan by APR alone. Instead, ask for a breakdown of fees and additional costs. Focus on the total amount you will pay, not just the interest. This will give you a clear picture of what you’re facing.

2.   Late Fees

One of the main benefits of payday loans is that you won’t be in debt for more than a few weeks. However, it goes without saying that this won’t be the case if you do not pay back on time. If you miss your repayment date, your lender will charge you late fees. You might also face increases in interest rates, depending on the lender.

Remember, unexpected expenses can always arise. You might be confident about repaying the loan but still face a financial emergency when it’s time. Keep this in mind when signing the agreement. Evaluate the late fees and then decide if they are payable or not.

3.   Prepayment Penalties

Some lenders might charge you for paying off your loan before it’s due. This is common with loans with a set interest rate because the lender will lose out on potential interest payments. While it only occurs sometimes, you must be cautious. Watch out for certain clauses in the fine print. Examples of such clauses are:

• If you repay the loan in full before the due date, the interest charged will be considered non-refundable, and you will not receive any rebate for early repayment.
• If the loan is paid off in full before the agreed-upon term, a fee equal to 10% of the loan amount will be charged for early repayment.

4.   Default and Debt Collection

If you do not repay your loan on time, your loan may default. Your lender might consequently turn the debt over to collections. This means that collection agencies will start to contact you and take legal action against you. Sometimes, the lender might file a lawsuit against you. Both these things will damage your credit score.

In this case, prevention is always better. Try to pay your loans on time. However, if you cannot do this, you must understand your state laws. Some laws will protect you from harassment and harm. Explore repayment options or seek legal advice to understand your rights better.

Endnote

Payday loans are valuable, but you must be wary of the fine print. Do your research thoroughly. Ensure you don’t get trapped in a cycle of debt. Read the terms mentioned above to expand your understanding and protect your finances.