Cost of Borrowing: Payday Loan vs Other Credit Options

Borrowing $300 for 14 days costs about $42 as a payday loan, compared with $7.65 as a credit card cash advance, $7.42 through overdraft protection and $5.92 from a line of credit, according to the Financial Consumer Agency of Canada. A payday loan can cost roughly seven to nine times more than these alternatives.

The Financial Consumer Agency of Canada (FCAC) compares the cost of a $300 loan taken for 14 days across four common credit options. The comparison assumes a payday loan at $14 per $100 (about 365% annual), a line of credit with a $5 administration fee and 8% annual interest, overdraft protection with a $5 fee plus 21% annual interest, and a credit card cash advance with a $5 fee plus 23% annual interest.

Why the gap is so large

A payday loan charges a flat fee for a very short term, so the annualised cost is far higher than for revolving credit. FCAC notes that the alternatives assume the borrower already has a relationship with a bank or credit union; people with low or no income may not have access to them, which is one reason payday loans remain attractive despite the cost.

Check your own numbers

Costs vary with the amount, the term and the rates you are offered. Use the figures here as a benchmark and compare them with the total cost of borrowing disclosed in any loan agreement before you sign.