The current cost of living has stretched every dollar for many Canadians. Living paycheque to paycheque, or even worse, not even making it to the next payday, has become the norm for a lot of us. Add in an unexpected expense like a flat tire or broken tooth, and you’re suddenly living two, three, or even four paycheques behind. These circumstances leave people stressed and scrambling to scrape together some cash fast. Not an ideal combination for making sound financial decisions.
Sadly, a subset of the financial industry has caught on to this and is capitalizing on these very situations. They claim to promise no hassle, quick cash. What they fail to explain is how short-lived the no-hassle part of the agreement is. They’re not going to be very forthright about that important piece of information, and it’s understandable that someone in these kinds of situations wouldn’t necessarily be thinking clearly enough to ask.
This is where this article comes in. Not all quick-cash solutions are created equal. We’re sorting through them to let you know the difference between not ideal (because being strapped for cash is never ideal) and the downright worst options. This way, if you ever find yourself in need of fast cash, you’ll know which options will help you in the moment without robbing you of financial stability in the future.
The bad: High-cost debt traps to avoid
What earned each of these options a spot on the “avoid” list is their cost. The interest rates these options charge often result in the borrower getting trapped in a crippling cycle of debt.
Payday loans
Payday lenders are everywhere. Their ease of access, combined with the lack of credit checks, makes them a popular choice for those in need of urgent cash flow. This all comes with a catch. This particular catch is a 300 – 400% interest rate. It’s a highly effective catch. Many people are already well into a debt spiral before they realize what’s happened. Penalties and fees are easy to come by with these loans. Borrowers often end up taking out another loan to cover the first. This leads them down a debt cycle that damages their credit score and strains their budget.
Collateral loans
These are loans offered by lenders like pawnshops and car title lenders. They’re short-term loans backed up by a personal item put up as collateral. The interest rates on these loans are usually very high, especially for the small amount of money they offer. So, if you don’t pay the money back on time, not only have you paid out a lot of money, but you also lose your item.
Cash advances
There are both good and bad cash advances. For now, we’re focused on the bad. We’ll touch on the good ones later. Bad cash advances typically come in two forms: credit cards and cash apps. Credit card cash advances are pretty well known because they’ve been around for a while now. Cash app advances, on the other hand, are new. These are small “instant loans” offered by digital lenders.
Because they’re new, many people don’t realize that they are, essentially, another form of payday loan. Beware, many of them are unregulated. Some are trying to make them seem harmless by marketing themselves as Earned Wage Access (more on that later, too). Rest assured, none of these options is harmless. They all charge extremely high interest, which starts accumulating immediately, and fees. It’s a lot of money to borrow a little.
The good: Safer alternatives to bridge the gap
Thankfully, there are many other options to get cash urgently that are significantly safer and more cost-effective alternatives. They range from tapping into your own money to using regulated, lower-interest credit products. Below are some of the most common ones.
Low-Interest options
These are options with solid regulations and have much lower interest rates, making them safer and more affordable.
Overdraft protection
Most banks offer overdraft services. This is when you spend more than what your bank account actually has. It means getting access to a bit of cash to tide you over. It also means avoiding things like insufficient fund charges that are very expensive.
Using overdraft protection does come with a small fee and interest. Typically, the fee is just a few dollars, and the interest is usually comparable to that of a credit card. Depending on your bank, the fee may be a monthly charge or a pay-per-use charge.
Overdraft is generally limited to between $250 and $5,000. The amount borrowed is repaid in one of two ways, depending on your financial institution. The first is by way of a linked account, such as a credit card or a line of credit. In this case, when an account goes into overdraft, funds are automatically pulled from the linked account to bring the account back to a positive balance. The second option is that the bank, essentially, repays itself the next time a deposit is made into the account.
There are two main benefits to this option. The first is the cost. While not insignificant, this is much more affordable than other quick cash alternatives. Second is the convenience. Once set up with your bank, you can access funds from overdraft anytime by simply going to an ATM.
Use a credit card
Credit cards have a built-in grace period, making them a good option for short-term emergencies. The caveat being that the balance is repaid in full before the grace period runs out. Do that, and it’s essentially no-cost borrowing. Don’t do that, and it can become an expensive option pretty quickly. So, before using this quick cash option, be sure you know how you’re going to pay the card off.
Apply for a personal loan/line of credit
Personal loans and lines of credit (LOC) offer a lump sum repayable over a longer term (six to 60 months). LOCs are a preferable alternative for fast money because they’re more flexible and often have rates that are more affordable. You only pay interest on the portion of the loan you’re utilizing, and they are easily accessible when an emergency happens.
Payday Alternative Loans
Payday Alternative Loans (PALs) are very similar to regular payday loans with a couple of key differences that make them more cost-effective and safer.
Firstly, there are typically restrictions on how many PALs can be taken out by one person within a certain time period.
Secondly, repayment timelines are generally much longer with PALs. Both of these differences are much more conducive to helping people balance their debt.
Lastly, unlike regular payday loans, PALs are reported to the credit bureau. The last difference can be a good thing or a bad thing, depending on whether you keep up with payments. If you keep up with payments, they can be an excellent way to build your credit score. On the other hand, any missed payments will mean a drop in your credit score.
There’s one caveat with PALs to be aware of: they are only offered by some credit unions. That means you have to be a member in order to be eligible to take one out.
No debt options
These options are ideal in some ways and not so ideal in other ways. All of them are ideal in that they don’t really involve a high cost of borrowing. They’re not so ideal in that, depending on your situation, these options may not actually be feasible for you.
Emergency/Sinking funds
Emergency funds and sinking funds are both savings set aside for particular reasons. One for significant emergencies and the other for more expected expenses that can throw your budget off track if the money hasn’t been set aside to pay for them. While neither of these is really set aside for everyday expenses, if you’ve put money towards them, it is debt-free money at your disposal. The key to using them for these situations is to have a plan in place to rebuild your account once your finances have stabilized. Of course, the obvious caveat to using this option is that it relies on you having already put money into one or both of these funds.
Payroll advance or Earned Wage Access
Some companies are now offering Earned Wage Access (EWA). This is the ability to access a portion of the wages you’ve already earned, but haven’t been paid for yet. This is an excellent fast cash option because there’s no interest involved, usually just a small fee of a couple of dollars. It’s typically done by way of an app on your phone, so it’s also very convenient. Not all companies offer this service, though, and the amount of funds you can access is limited.
Other
Here are a few other no-cost options you can consider.
Sell unwanted personal belongings – Most of us have stuff lying around collecting dust. Dig around a bit, and you might find some semi-precious treasures to get a few dollars.
Reward and loyalty programs – It can be easy to forget that these programs are, essentially, a source of funds. Depending on what programs you’re in, they may help cover some costs until next payday.
Ask family or friends – If you go this route, be sure to lay out very clear repayment terms. You could offer to do something (rake the leaves or cook dinner) in return for the cash. Or, do it as a thank you over and above paying the cash back.
Negotiate with creditors – Some creditors offer short-term deferrals. Deferring one of your payments may free up enough cash to get you through to your next payday.
Start a side gig – There are a vast number of side gig options out there now. Take one on for a couple of weeks to earn a few extra dollars.
Government and community programs – Numerous government and community programs offer either financial help or help getting essentials like food, so the cash you do have is freed up to go to other needs.
Short-term fixes vs. long-term health
Here’s the thing: when faced with this kind of situation, you need to be honest with yourself. Is this truly a unique situation, or is being short before your next payday a pattern? It’s all well and good to look for quick cash when it’s a very unexpected, unique situation. If it’s a pattern, that’s a whole other story. In that case, getting your hands on some money fast isn’t a solution; It’s a band-aid. To really fix the issue and stop living payday to payday, you’ll need to take an in-depth look at your finances and build some good money habits. Take some time to learn:
- How to make a budget
- How to build an emergency/sinking fund
- How to read and understand your credit report
- How to manage your debt effectively
- How compound interest works
Wrap up
Sometimes, a quick influx of cash will do the trick and get you through to your next payday. Other times, it’s these quick cash influxes that end up either starting or deepening a debt spiral. Quite often, it comes down to two mitigating factors that define which way things are going: where the cash comes from and financial habits. If you’re relying on high-interest debt to make ends meet and don’t have solid financial habits, it’s critical to take corrective action as soon as possible to stop the money drain and start rebuilding.
If this information has come to you too late and you’re already struggling with debt, we can help. Our trained Credit Counsellors will assess your situation and recommend a path forward to get your finances back on track. To get started, call for a free, no-obligation consultation.
