A payday loan is a short-term, high-cost loan that you agree to repay on your next payday, usually within 62 days. In Canada the cost is not quoted as an annual rate. It is quoted as a flat fee per $100 borrowed, which hides how expensive the loan is once you convert that fee into an annual percentage rate. That is why the true cost surprises so many borrowers: the fee looks small next to the amount borrowed, but it is charged over a window of only a couple of weeks.
How the Fee Works
Federal rules set a maximum fee of $14 per $100 borrowed for payday loans, a maximum loan of $1,500, a term of no more than 62 days, and a dishonoured-payment fee of no more than $20. Because the fee is charged over such a short term, the effective annual percentage rate runs into the hundreds of percent. The federal criminal rate of interest, which applies to most other credit, is 35% APR, so a payday loan is a narrow, separately regulated exception.
Payday Loan Compared With Other Options
The Financial Consumer Agency of Canada compared the cost of borrowing $300 for 14 days across several products. The gap is stark.
| Option | Cost to borrow $300 for 14 days |
|---|---|
| Payday loan | About $42 to $63 |
| Credit card cash advance | About $4 to $8 |
| Overdraft | About $2.40 to $7 |
| Line of credit | About $1.15 to $5.81 |
These figures are illustrative comparisons from the FCAC, not quotes. They show that the same short-term need can cost ten times more through a payday lender than through a line of credit. The point is not that everyone can access a line of credit, but that cheaper options should be checked first.
Why the Cost Adds Up Fast
A payday loan is designed to be repaid in one lump sum. If your paycheque is smaller than expected or an unexpected bill lands, you may not have the full amount on the due date. Some borrowers renew or roll the loan, paying a new fee to push the due date out. Each renewal adds another fee without reducing the principal, so the debt can grow even though you keep paying. That pattern is the core of the payday loan trap.
- The fee is charged again on every renewal.
- The principal does not shrink while you only pay fees.
- A dishonoured payment can add up to $20 on top.
- Defaults can be reported and sent to collections.
Where Payday Loans Are Regulated
Payday lending is regulated by the provinces. Nine provinces have their own payday regimes, which set licensing, fee caps, cooling-off periods, and repayment rules. Quebec effectively bans payday loans. If you are considering a payday loan, confirm the lender is licensed in your province, because an unlicensed lender is operating outside the law and you have far less protection.
Cheaper Alternatives to Check First
- A small instalment loan. Repaid over months rather than weeks, with the cost spread out.
- A credit card cash advance. Expensive for a card, but still far cheaper than a payday loan.
- Overdraft or a line of credit. The cheapest short-term options in the FCAC comparison.
- A payment arrangement. Many utilities and service providers will split a bill if you call before the due date.
- Credit counselling. A non-profit counsellor can help you build a repayment plan.
If you are already stuck in a payday cycle, a consumer proposal or credit counselling may offer a structured way out. Speak to a licensed insolvency trustee or a non-profit credit counsellor before you take another loan to cover the last one.
Reading the Cost Before You Sign
Ask the lender for three numbers in writing: the amount you will receive, the total you must repay, and the date it is due. Subtract the first from the second to see the fee in dollars, then compare that fee with what a credit card cash advance or a line of credit would charge over the same period. If the difference is large, and it usually is, the payday loan is the more expensive path. Never rely on a monthly or weekly figure a lender quotes, because a payday loan is not billed that way.
Sources and further reading
- Financial Consumer Agency of Canada: Payday loans, including the cost comparison used above.
- Criminal Interest Rate Regulations (SOR/2024-114), which set the federal payday loan fee cap and the 35% criminal rate.
This is general information, not financial advice. Instalment.ca is a loan matching and comparison service, not a lender and not a financial advisor. All loan terms, rates, and fees are set by individual licensed lenders and are subject to credit approval.