One of the most important things Ontario consumers should understand before taking out a payday loan is the total cost of borrowing. Because payday loans are short-term products, borrowers may focus primarily on receiving money quickly and overlook how much they will ultimately have to repay.
Ontario has established a maximum cost of borrowing for payday loans. As of January 1, 2025, payday lenders cannot charge more than $14 for every $100 borrowed, including applicable fees and charges directly or indirectly connected with the payday loan agreement.
Consider a simple example. If someone borrows $200, the maximum basic borrowing cost would be $28. If the person borrows $500, the maximum would be $70. A $500 loan could therefore require repayment of $570 under the basic loan terms. These examples illustrate why borrowers should look at the dollar amount they will repay rather than concentrating only on the amount deposited into their bank account.
Ontario also requires payday lenders to disclose the cost of borrowing as an annual percentage rate in advertising or agreements. APR information can make it easier to compare the cost of payday borrowing with other forms of credit, although payday loans have a very different repayment period from many traditional credit products.
There can also be consequences if a borrower does not have enough money available when repayment is attempted. Ontario’s rules place limits on fees for dishonoured payments. Since January 1, 2025, the maximum fee a payday lender may charge for a dishonoured payment is $20, subject to the legislation and applicable circumstances.
Borrowers should also ask what happens if the loan becomes overdue. Ontario regulations establish a maximum interest rate of 2.5% per month, non-compounding, on the outstanding principal of a payday loan in default.
Another important protection concerns repayment arrangements. If a borrower takes out three payday loans within a 63-day period, the lender must provide the option of an extended payment plan. Depending on the borrower’s pay schedule, repayments are spread over multiple pay periods according to rules established by Ontario. Borrowers can make prepayments without an additional fee or penalty under the extended payment plan.
Understanding these rules does not necessarily make a payday loan inexpensive. Ontario’s government describes payday loans as an expensive form of consumer credit and encourages consumers to consider alternatives before borrowing.
Before accepting a payday loan, calculate the complete repayment amount, identify the exact repayment date and consider whether the payment will leave enough money for essential expenses. The most useful question is not simply, “How much can I borrow?” but “How much will I have to repay, and can I comfortably make that payment when it is due?”
Understanding the cost in advance gives consumers a clearer picture of the financial commitment they are making.
