How to avoid a payday loan ‘debt trap’ to give kids a Christmas they ‘deserve’

Around the holiday season, it’s easy for Canadians to put a dent in their wallet, especially when it comes to buying gifts for children. But payday loan services are targeting vulnerable parents into a holiday debt trap, a think tank warns.

A new report by North American think tank Cardus claims payday loan stores are using sophisticated marketing strategies to target parents who are cash-strapped this holiday season.

“They have been saying look, ‘it’s Christmas time, your kids deserve it, why don’t you just come in here and take a loan and then you can afford the gifts to give to your kids,'” Brian Dijkema said, Director of Work and Economics at Cardus.

“They are sort of targeting that guilt complex, that if you don’t do this, you’re really not a good parent.”

READ MORE: ‘They like having people in debt’ – Your payday loan stories

For example, one company called Bucks for Canucks, which does not provide loans but advertises payday loan services, features an advertorial from a “loan applicant” who wanted to give their children a “Christmas they deserve.”

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When contacted by Global News, Bucks for Canucks said the advertorial on their site was written by a hired writer.

“Our writers create content based on keywords phrases used by people in Canada who use the major search engines such as Google, Yahoo, Bing, etc. This article was written because people in Canada search “LOANS FOR CHRISTMAS” a lot during the silly season (sadly),” a company spokesperson wrote in an email.

But according to Dijkema, the problem with payday loans for Christmas is that borrowers who are already struggling to pay their bills could end up trapped in a cycle of repeat loans that will create unsustainable long-term debt.

“What ends up happening is that that cost eats into people’s cash flow. And what seems like a small borrowing in one place may end up costing you much, much more in the long run.”

When you borrow a sum of money from a payday loan service, you are required to give that money back as well as the high-interest in a short amount of time, Dijkema explained.

What often ends up happening is that borrowers are not able to pay that large sum payment on time and are forced to rely on another payday loan, which could end up turning into a vicious cycle, he added.

Canadian Payday Loan Association president Tony Irwin says how individual companies advertise their services is up to them.

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“Our members provide a small sum short-term-loans because there is a need for them. It’s not about targeting particular groups or particular people, our members provide a service that is very much in need and customers come to their stores when they have a short fall,” Irwin said.

“Whether it be now or 365 days a year, that’s what our members do for their customers.”

READ MORE: Inside the payday loan cycle

For a $300 14-day payday loan, consumers can expect to pay an additional $63 in costs, according to the Financial Consumer Agency of Canada. That’s much more than a cash advance on a credit card for the same amount ($7.42 in additional charges), overdraft protection on a bank account ($7.19) or borrowing from a line of credit ($5.81).

A payday loan has the equivalent interest rate of 500-600 per cent, according to Credit Counselling Society, a non-profit credit counselling agency.

That’s why Dijkema wants people to know that there are cheaper alternatives for people who don’t have the means to buy gifts.

“Gift giving is a wonderful and beautiful tradition. But I think we should all realize though that the gifts should be something that actually gives life to everybody, and not something that is done to create stress and long term damage,” Dijkema said.

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He recommends borrowing from a friend or pooling money together as a family to buy one big gift for your child.

Or if that is not an option, borrowing from a credit card or getting a line of credit is much cheaper than a payday loan, he said.

You can also get community-backed small loans from houses of worship, charities and community foundations who partner with credit unions and offer lower borrowing rates, he added.

READ MORE: How to survive a financial emergency

When it comes down to it though, Dijkema says the government needs to do more to reform and regulate the payday loan industry.

In the report, he recommends taking the same approach that Colorado did in 2010, which requires all payday loans to be repayable over at least a six month period.

Currently, you have to pay it back in 62 days, but most loans push for a 10-day-term, Dijkema said.

“We are suggesting that the government put regulations in place that require lenders to offer those loans over a longer period of time. And that would help relieve the cash crunch that many people are feeling when they have to pay those loans back.”

–With files from Leslie Young, Global News.