A payday loan is a very short loan you take out with the commitment to pay it back from your next pay cheque. It is also know as a payday advance or cash advance. If you're short on cash right now, but you're expecting a paycheque in the near future, a payday loan can provide you with the fund that you need now.

A payday loan is a very expensive way to borrow money that charge high interest rates and are not intended as a solution for long term financial problems.

Once you have been approved for a payday loan, the cash will be deposited directly into your bank account. One your next pay day, the amount will be withdrawn from your bank account plus interest.

During the application process the payday loans lender will ask for proof that you:

• Have a regular income;
• A permanent address
• An active bank account
• Are over the age of 18

As a security measure to ensure you pay back the loan all payday lenders will ask that you provide a post date cheque or authorize a direct debit from you bank account for the loan amount plus all the interest and fees.

You will also be asked to sign a loan agreement, or at least you should. If you have not been offered one, it's best to ask for a copy of the loan agreement, as this will help to avoid any miscommunication in the future.

By signing this agreement you acknowledge that you will pay all fees, interest and charges associated with the payday loan so be sure to read it carefully.

Payday loans are very expensive ways to borrow money as they are unsecured (ie. you do not have to pledge an asset such as a house or car as collateral against the loan), so payday loan lenders charge higher interest rates.

The following fees and charges can occur with payday loans, but not necessarily on every one. Please check the payday loan agreement very carefully before taking out the loan.

Interest

Payday loans interest is charged right from the day you take out the loan until the payback date including all the fees.

Payday loans lenders used to be able to charge an insane maximum 60% interest rate on a loan, according to the Criminal Code of Canada. However, many provinces have recently passed maximum loan caps that are much lower than this.

There have been court cases where payday loan lenders have taken customers to court for not paying back a payday loan, and the courts ruled in favour of the borrower as they determined that fees and charges connected with payday loans should actually be counted as interest and when totalled up, were alot higher than the 60% interest allowed, and were disallowed.

That is why you will see payday loan charges show as $21 per $100 rather than 21% - as all fees and charges need to be included in the total.

Province by province payday loans maximum fees are as follows:

• BC: $23 per $100 borrowed
• Manitoba: $17 per $100 borrowed
• Nova Scotia: $31 per $100 borrowed
• Ontario: requires federal designation before the maximum total cost of borrowing cap for payday loan agreements will come into force
• Saskatchewan: $23 per $100 borrowed (30% on defaulted loan)

Administration/processing fee

These are all types of charges companies can include in the loans. They are also known as convenience or verification fees.

These fees can cost anywhere from $10 to $35 for every $100 borrowed - or 10 to 35 percent of the loan amount.

Broker's fee

Sometimes a payday loans lender may act as a broker between you and the lender and charge a 'broker fee' for arranging the loan. This would be over and above any interest charged.

Collection fees

If you don't pay back your fee, the lender could send this to a collections agency who will contact you about the debt and try and collect it. The lender may then carge a few for collecting it.

Early repayment fee

This is a fee that can be charged if you pay your loan back early.

Initial or one-time set-up fee

Some payday loans lenders charge a one-time set up fee of between $10 to $15 if you are a first-time customer.

Loan repayment fee

This is a fee that applies when you don't repay the loan in cash on or before the due date.

Locate fee

This fee is charged if mail that is sent to the address that you provided during the application is returned or if the phone number provider doesn't work when the payday loan lender tries to get in touch with you.

NSF fee

When the payday loans lender goes to cash the pre-authorized cheque or direct debit you provided and there isn't enough cash in your account, the lender could charge a non-sufficient funds or NSF fee, as a bank would, and this can range from $25 to $75.

As a double whammy your bank or credit union may also charge you a NSF fee if there is not enough money in your account.

Ironically, many payday loans lenders say that using their services is cheaper than taking a NSF charge from the bank if don't have enough money in your account to make a payment.

Roll-over, renewal, finance, additional, extension fees

This fee is applied when you don't repay the loan in cash on time and you need to rollover the original loan into another time period. Before this is done, you'll typically need to pay this additional fee.

Wage assignments or liens on personal property

A payday loans lender may try and get you to sign agreement where you say that you give your employer authority to sign over all of your pay to the payday loans lender if you don't repay the loan. In many provinces, this is illegal.

If this is happening to you and it's illegal in your province, you can call the Financial Consumer Agency of Canada toll-free at 1-866-461-3222.

Also, payday loans lenders may also try to get your personal property as a collateral or security for the loan in case you can't pay it back. Just note that the value of this personal property such as a car or stereo could be greater than the amount of the loan you are receiving. Once it's given to the lender it could be very difficult to get back.

Other products

Some payday loans lenders could also offer you insurance coverage, such as death or disability insurance. This insurance is usually very expensive and you may not need it. Get any details on what it covers, how much it costs and how you can make a claim.

The payday loans lender will also need licenses to sell insurance so ask to see proof that they're licensed. You can call the Financial Consumer Agency of Canada toll-free at 1-866-461-3222, to find the appropriate government body in your area that can hlep with this issue.

Some payday loans lenders may also offer electronic cards that allow you access to different branches of the same payday lender. These can be loaded with your own personal information and used like a debit card and can come with may more fees attached, so please check the fine print on any agreements. Additional fees can include issuing fees, reloading fees and if you lose the card, the funds may not be reimbursed to you.

The maximum amount you can borrow is typically limited to 50% of the net amount of your next pay cheque, that is after all deductions for income tax, CPP, etc. For example, if your pay cheque is $1,500 net every two weeks, your payday loan could be for a maximum of $750 ($1,500 x 50%).

Normally, you have to pay back a payday loan on or before your next payday (usually in two weeks or less) and that is why many payday lenders offer maximum loan terms of 15 days.

Payday loans are offered by privately owned payday loans companies and also by many places that you can cash cheques. The provincial governments are responsible for regulating payday loans companies and lenders as the federal government does not regulate them.

You can find a list of the payday lenders included in RateSupermarket.ca's payday loans comparison.

Whenever you apply for credit or to borrow money using a credit card, loan or mortgage, the lender will typically run a credit report to view your credit history to gauge how likely you are to repay the loan.

You can find further details on what affects your credit report here.

Currently payday loans will not show up on your credit report as payday loans lenders are not currently registered with the main credit reporting agencies. On the flip side, paying off a payday loan on time will also not improve your credit score.

However, if you do not repay your payday loan on time and it's sent to a collection agency, they could send this to the credit-reporting agency, which could in turn negatively affect your credit report.