How Are Payday Loans Different In The US To Canada?

Payday loans are short term loans that offer a quick injection of cash for borrowers in both the United States and Canada. While payday loans may seem similar in both countries, there are notable differences in how they are regulated, their loan amounts, loan terms, collection practices and their overall impact on consumers. In this article, Dollar Hand explores these differences in detail.

What Are Payday Loans?

Payday loans offer a way to borrow money quickly in a fast and convenient manner. Often used to pay for medical bills, dental fees, auto repairs, home renovations, utility bills and rent, they help borrowers to stay financially afloat until they receive their next paycheck on their upcoming payday.

Payday loans typically have high APR rates so it is important to only take them out if you are certain you will be able to afford the repayments. Otherwise you could face late fees and damage to your credit score.

What Are 3 Key Differences Between Payday Loans In The US And Canada?

1. Loan Regulations

One of the key differences between payday loans in the United States and Canada is the regulatory environment. Payday loans are regulated at both the federal and state levels in the United States and provincial levels in Canada. However, Canadian provinces generally have stricter regulations compared to US states.

In Canada, payday loans are subject to regulations that vary by province. For example, in Ontario, the most populous province in Canada, payday lenders must be licensed and are subject to caps on interest rates and fees. As of the 1st of January, 2018, the maximum cost of borrowing for a payday loan in Ontario is $15 per $100 borrowed and the total repayment amount cannot exceed $1,500 CAD or 50% of the borrower’s net income for the term of the loan, whichever is less. Other provinces in Canada also have similar regulations in place to protect consumers from predatory lending practices.

In the United States, payday loan regulations vary by state, and there is no federal cap on interest rates or fees. Some states have strict regulations, while others have more lenient or no regulations at all. For example, in states like California, there are interest rate caps and other consumer protections in place, while in states like Texas and Florida, payday loans are largely unregulated and lenders can charge higher interest rates and fees. 

This variation in regulations can result in significant differences in the cost of borrowing and overall consumer protections for payday loan borrowers in different US states. There are also 13 US states where payday loans are currently illegal. This includes Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, West Virginia, and the District of Columbia.

2. Loan Amounts

Another difference between payday loans in the United States and Canada is the loan amounts that are typically offered. In Canada, payday loan amounts are generally all around a similar value in all the provinces. For example, in Prince Edward Island and Nova Scotia, the maximum payday loan amount is typically limited to $1,500 CAD, whereas in many US states, payday loans can range from a few hundred dollars to several thousand dollars. 

See examples of the maximum borrowing amounts in the table below:

Sources: National Conference of State Legislatures and Government of Canada

3. Loan Terms

Payday loan terms also differ between the United States and Canada. Whilst the overall amount of time a borrower will have to pay back their loan depends on multiple factors such as the lender and the customer’s credit score, there are regulations in both the US and Canada which involve maximum loan terms.

 In Canada, borrowers can repay their payday over 2 weeks to 2 months, with 62 days being the maximum loan term available in Canada. In contrast, the loan terms available in the US vary widely by state. For instance, loans can be borrowed for up to 31 days in Alabama, California or Iowa, 120 days in Illinois, 180 days in Colorado or Texas, and up to 365 days in Ohio.

A key similarity in both locations however is that failure to pay back the loan on the due date could lead to negative consequences. This includes late fees, extra interest charges and damage to your credit score. Debt collection is also quite similar in the countries as in Canada there are strict rules that include limitations on the frequency and methods of collection, and in the US there are debt collection practices regulated by the federal Fair Debt Collection Practices Act (FDCPA) which offers certain protection to borrowers.

What Are Alternatives To Payday Loans In Canada And The US?

If you need fast cash, there are other options you can also consider. Examples include personal loans which may offer lower interest rates or longer repayment terms than payday loans. You could also look into a low interest credit card or ask your bank for an authorized overdraft.

Borrowing money from family and friends is also an alternative to payday loans that could involve zero interest or fees. However, it is essential to create a formalized agreement with your relative or friend if you decide to do this to avoid any strains in your relationship.

You could get creative and start a side hustle to boost your cash flow. Following useful tips such as ways to save money on energy bills, fuel or food shops will also stand you in good stead. There is also always the option to sell unwanted items you no longer need via garage sales or online platforms such as eBay.

Justine Gray

Justine is a full-time writer with lots of expertise and a wealth of experience in the financial world. In particular, she specializes in household income and consumer finance across the United States. Follow her articles for useful advice and top tips, guides on how to save money and lots more.