Middle of the month and you're short of cash? Well, there are more than 1,300 storefront operations across the country eager to help you get through to that next paycheque. They're called payday loan companies and they're part of a $2-billion a year business that serves more than two million Canadians annually.

The industry says its members are providing a vital service that isn't easily available anywhere else. The big banks don't offer small, short-term loans to cover unexpected expenses. Payday loan companies will. For a price. But critics say the price is way too high.

What is a payday loan?

It's a short-term loan that you promise to pay back out of your next paycheque. The amount that you borrow is usually limited to about 30 per cent of your take-home pay.

The Canadian Payday Loan Association says the average payday loan is approximately $280 and the average length of the loan is 10 days. The association notes that the loans its members make are not a form of revolving credit that keeps a customer in a permanent state of debt.

How do payday loans work?

To qualify for one of these loans, you have to have a job, an active bank account and a permanent address. There is no credit check. You sign the loan agreement and leave a cheque to cover the amount of the loan and all fees and service charges. The cheque is dated for your next payday.

The loan agreement will state that you understand all the terms and conditions of the loan. And that you understand how much the loan will cost you.

The terms and conditions usually include items such as:

• The amount of the loan and the date it must be paid back.
• Up-front or first-time charges added to the amount of the loan.
• Service fees and charges.
• Repayment options.
• Charges for early or late repayment.

How much do payday loans cost?

They are the most expensive legal way to borrow money.

The cost will vary from outlet to outlet, but you can usually expect to face charges including:

• Interest.
• Administration fee.
• Processing fee.
• Convenience charges.
• Verification fee.
• Broker's fee.
• Collection fees.
• Early repayment fee.
• Late repayment fee.
• Initial or one-time set-up fee.
• Rollover fee.

Typically, you can expect to pay up to $100 in interest and fees for a $300 payday loan. The Financial Consumer Agency of Canada says that amounts to an effective annual interest rate of 435 per cent on a 14-day loan.

The agency says getting a cash advance on a credit card - while still very expensive - is a comparative bargain at an effective annual interest rate of 36 per cent. Better still, is an overdraft on your bank account, which works out to about 21 per cent. The effective rate of borrowing from a line of credit for two weeks would be a relatively meagre 10 per cent.

The benefit of a payday loan is that the customer does not have to seek credit approval.

Isn't there a limit on how much interest I have to pay on a loan?

Yes. The Criminal Code of Canada says if a lender charges more than 60 per cent annual interest on a loan that lender is committing a criminal act that could lead to a prison term of up to five years.

Payday loan companies typically charge a rate of interest that works out to slightly less than 60 per cent a year. However, all the added fees make the total cost of borrowing much higher. The criminal code so far has not addressed those fees.

Another problem is that interest rates have always fallen under federal jurisdiction. But consumer protection has been a provincial responsibility. That has left payday loan companies largely unregulated across the country. Only Quebec has provincial legislation preventing the firms from operating.

Under proposed federal legislation, the Criminal Code will be amended to allow the provinces to set short-term interest rates for payday loan companies.

What is the industry's stand on regulating payday loan companies?

The Canadian Payday Loan Association has been calling for regulations for some time. It represents 22 companies with more than 850 retail outlets across the country. The association has set up a Code of Best Business Practices that its members must adhere to in order to remain a member of the association.

Among the code's provisions is a ban on "rollovers." That prevents a member company from extending an outstanding payday loan for a fee or from granting a new payday loan to pay off an existing one. Critics of the industry cite rollover loans as one way some companies keep people in debt at high rates for the long term.

The code also requires member companies to advise customers who have defaulted on their loans twice within a year that credit counselling services are available. The companies must also offer to forgo the accrual of interest if the customer seeks credit counselling.

The industry says most people who use payday loan companies are happy with the service and that they understand the charges they are paying. A survey conducted for the association by Environics Research found that, overall, only 11 per cent of Canadians have a favourable opinion of payday loan companies. But 59 per cent of people who used the companies have a favourable opinion.

Why legislate if there is a code of behaviour?

The code is voluntary - and there are many payday loan outlets that are not members of the Canadian Payday Loan Association.