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

As the holiday season approaches, it’s easy for Canadians to put a dent in their wallets, especially when it comes to shopping for gifts for the kids. But payday loan services are targeting vulnerable parents in a holiday debt trap, a think tank warns.

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

“They said, look, it’s Christmas, your kids deserve it, why don’t you come here and get yourself a loan and then you can afford the presents to give your kids,” said Brian Dijkema, director. labor and economy at Cardus.

“They kind of target this guilt complex, that if you don’t, you’re really not a good parent.”

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

For example, a company called Bucks for Canucks, which does not lend but advertises payday loan services, features an infomercial from a “loan seeker” who wanted to give his kids a “Christmas they deserve.”

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Contacted by Global News, Bucks for Canucks said the infomercial on their site was written by a hired editor.

“Our writers create content based on keywords used by people in Canada who use major search engines such as Google, Yahoo, Bing, etc. This article was written because people in Canada search a lot for “READY FOR CHRISTMAS’ during silly season. (unfortunately),” 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 find themselves trapped in a cycle of repeated loans that will create unsustainable long-term debt.

“What ends up happening is that cost is eating away at people’s cash flow. And what seems like a small loan in one place can end up costing you much, much more in the long run.

When you borrow a sum of money from a payday loan service, you have to repay that money plus the high interest in a short period of time, Dijkema explained.

What often ends up happening is that borrowers are unable to pay that large sum on time and are forced to rely on another payday loan, which could end up turning into a vicious cycle, a he added.

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

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“Our members provide a small amount of short-term loans because there is a need for them. It’s not about targeting particular groups or particular people, our members are providing a service that is badly needed and customers come to their stores when they have a shortfall,” Irwin said.

“Whether it’s 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 payday loan over 14 days, consumers can expect to pay $63 more in fees, according to the Financial Consumer Agency of Canada. It’s much more than a cash advance on a credit card for the same amount ($7.42 additional fee), overdraft protection on a bank account ($7.19) or borrowing on margin credit ($5.81).

A payday loan has an equivalent interest rate of 500 to 600 percent, according to the Credit Counseling Society, a nonprofit credit counseling agency.

That’s why Dijkema wants people to know that there are cheaper alternatives for people who can’t afford gifts.

“Giving gifts is a wonderful and beautiful tradition. But I think we should all realize that gifts should be something that really gives life to everyone, 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 a big gift for your child.

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

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

READ MORE: How to survive a financial emergency

Ultimately, Dijkema says the government needs to do more to reform and regulate the payday loan industry.

In the report, he recommends adopting the same approach as 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 are pushing for 10 days, Dijkema said.

“We suggest the government put in place regulations that force lenders to offer these loans for a longer period. And it would help relieve the lack of cash that many people feel when they have to repay these loans.

–With files from Leslie Young, Global News.

© 2016 Global News, a division of Corus Entertainment Inc.