Payday Loan
Prêt sur salaire in French
Quick definition
A payday loan is a small short-term loan, typically up to $1,500, that must be repaid in full on your next payday. It is legal and regulated in most provinces, and it is by far the most expensive mainstream way to borrow money in Canada.
How a payday loan works
You borrow a small amount, usually between $100 and $1,500, and agree to repay it plus a fee on your next payday, generally within 62 days. The lender secures the loan with a post-dated cheque or a pre-authorized debit on your bank account, so repayment happens automatically whether or not the money is there. If it is not, you get hit with NSF fees from your bank and often from the lender too, on top of what you already owe.
Approval is fast because payday lenders typically do not check your credit score; they mostly want proof of income and a bank account. The flip side is that most of them do not report your on-time payments to the credit bureaus either, so a payday loan does nothing to build your credit report. Defaulting, on the other hand, can end up in collections and do real damage.
The real cost: what $14 per $100 actually means
The fee is capped at $14 per $100 borrowed across the provinces where payday lending operates, a federal cap in effect since January 1, 2025 (as of July 2026). That sounds like 14%, which sounds almost reasonable. It is not, because the 14% is for two weeks, not a year.
Here is the honest math. Borrow $300 until payday in 14 days and the fee is $42. That is 14% of the loan for 14 days. To compare it with any other form of credit you have to annualize it: 14% multiplied by 365 divided by 14 comes out to roughly 365% as an annual rate. A typical credit card charges around 20% a year, and a line of credit priced at prime rate plus a few points usually lands under 10% (as of July 2026). Dollar for dollar, a payday loan costs fifteen to thirty times more than the alternatives.
The 2025 law change
On January 1, 2025, Canada lowered its criminal interest rate to 35% APR; charging more than that is now a Criminal Code offence. Payday loans survive through a specific exemption: they may charge up to the $14 per $100 cap, but only in provinces with a regulatory regime approved by the federal government, which includes licensing, disclosure rules, and borrower protections.
Québec never joined the industry: its provincial cap on consumer lending costs is set so low that payday lending is not viable there, so the province effectively has no payday loan industry.
The debt cycle
The structural problem with a payday loan is that it takes a bite out of a paycheque that was already too small. Repaying $342 out of your next pay often leaves you short again, and the easiest fix on offer is another loan. Most provinces ban rollovers, meaning a lender cannot extend your loan for a new fee, but nothing stops you from repaying on Friday and taking a fresh loan on Monday, from the same lender or the one across the street. Regulators consistently find that a large share of payday borrowers are repeat borrowers, which is exactly how a two-week loan becomes a months-long expense.
Cheaper alternatives, in rough order
If you are short before payday, almost anything below costs less than a payday loan. Work down this ladder before walking into a payday storefront:
- Ask your employer for a pay advance. Many will advance earned wages at no cost, and some payroll providers offer earned-wage access for a small flat fee.
- Credit union small-loan programs. Several credit unions offer small short-term loans designed specifically as payday alternatives, at a tiny fraction of the cost.
- A personal line of credit. If you can qualify, this is the cheapest recurring safety net, typically priced at prime plus a spread.
- A credit card cash advance. Interest starts immediately and the rate is high, but around 20% a year is still far cheaper than roughly 365%.
- Community resources. Food banks, utility payment deferrals, rent banks, and dialing 211 for local emergency assistance can cover the essentials so you do not have to borrow at all.
Your provincial rights
In every province with a payday regime, lenders must be licensed and must disclose the cost of the loan both in dollars and as an annual rate, usually on a poster at the counter and in the contract. You have a cooling-off period, typically two business days, to cancel the loan and return the money without paying any fee. Rollovers and lending against more than a set share of your paycheque are banned in most provinces, and some require extended payment plans for repeat borrowers. If a lender skips any of this, report them to your provincial consumer protection office.
In Canada
Payday lending in Canada sits on a split foundation: the federal Criminal Code sets the interest ceiling and the exemption, while provinces license lenders and enforce consumer protections, so the details of cooling-off periods and penalties vary by province. The industry operates mainly in Ontario, the western provinces, and the Atlantic provinces; Québec stands apart with rules strict enough that payday lenders never set up shop. None of this is a moral judgment on borrowers: people use payday loans because they are fast, nearby, and available with weak credit. The point of knowing the real cost is simply to make the cheaper doors easier to choose.
Worked example
Jordan is $400 short two weeks before payday and borrows it from a payday lender. The fee is $56 ($14 per $100), so $456 comes out of the next paycheque automatically. That leaves Jordan short again, so he borrows another $400 the same day. After three back-to-back loans over six weeks, he has paid $168 in fees to borrow $400, about 42% of the loan in a month and a half. The same $400 as a credit card cash advance at around 20% a year would have cost roughly $9 over the same six weeks.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated July 2026