Payday loans: There’s a better way to get quick, easy cash

Need fast and easy cash? The Internet is loaded with payday loan companies that can provide a quick fix. But before you feed your expensive cash habit take a little time to think about how much money you can save by establishing a long-term credit relationship.

Payday loans are intended as a short-term financial solution. Most providers even state that somewhere on their websites among repeated references the words "quick", "easy" and "cash". It seems those three words win out in the end when you consider payday loan operators service an estimated two million customers a year in Canada.

How payday loans work

According to the Canadian Payday Loan Association the average loan is $280 for a period of ten days. To qualify, all you need is a job, a bank account and a pulse. The borrower writes a post-dated cheque for the amount borrowed, plus interest and fees, dated for the next payday.

The terms and conditions are not as quick and easy to find and require little more digging beyond the home page. They vary from province to province but in Ontario, for example, the maximum amount that can be charged by law - including interest and fees - is $21 for every $100 borrowed. If the loan is not repaid when payday comes around, interest on each $100 can not exceed 90 cents a week for the first 13 weeks and 50 cents a week afterward.

If you compare that charge of $21 per $100 borrowed to a conventional loan averaged out over a year the interest exceeds 120,000 per cent. Canadian Payday Loan Association president Stan Keyes points out that the comparison is unfair — like averaging out a two night stay in a luxury hotel and comparing it with a one year apartment rental. You pay for the convenience.

True, but Canadians drowning in debt can't afford such an expensive convenience when a little bit of planning can slash the cost of borrowing to a sliver of a fraction of a payday loan. And if you plan right, access to cash can be quicker and easier.

How to build a better lender relationship

It starts with building a relationship with your own financial institution and that starts with building a good credit rating. That will be difficult to impossible if you tend to miss loan or bill payments or have a record of default — but there's always hope.

It's important to find a financial institution you like now, and one that can administer your future needs such as a registered retirement savings plan (RRSP) or a tax free savings account (TFSA). Call or email a representative and ask about establishing a line of credit. Interest rates on consumer lines of credit can be below 10 per cent averaged over a year — much lower than the 20 to 30 per cent rates on credit card balances.

If you qualify, getting cash can be as easy as transferring money online from your line of credit to your bank account, and going to the nearest cash machine.

Relationships with financial institutions tend to flourish as you build equity. As an example, mortgage rates are generally lower than consumer rates because a house can be sold to cover the mortgage in the event of default. The house is considered collateral. Interest rates are higher when there is no collateral because the bank assumes the risk that the lender has no equity to cover the loan.

As equity in a house builds, homeowners can tie their lines of credit to their mortgages and obtain what is called a secured line of credit. Secured lines of credit use the appraised value of the house minus the mortgage owing as collateral for the loan. Since there are assets to back up the loan the interest rate is only slightly above the bank's prime lending rate, which is 3 per cent right now. Banks offer their prime lending rate to the folks and businesses that have the best credit ratings. In some cases mortgages are offered below prime.

If you have the discipline a secured line of credit can be financial Nirvana not only for quick fixes but for a lifetime. You will always have the best rate available at your fingertips to consolidate other high interest debt, cover emergency car repairs, make registered retirement savings plan contributions against your tax return or lend money to a friend or relative caught in a payday loan debt trap.