Payday loans are short-term, high-cost loans that are regulated province by province, and most payday lenders do not use co-signers at all. If you are asked to co-sign one, the cost caps and the federal criminal interest rate are the two facts you need to understand first.
Payday loans occupy a distinct corner of Canadian credit. They are small, short-term advances that are usually repaid on your next payday, and they are regulated differently from ordinary loans. Because they are so expensive relative to the amount borrowed, the question of co-signing rarely arises — but when it does, the stakes are high enough that the rules deserve a careful look.
How payday loans work in Canada
A payday loan is typically a small advance, often a few hundred dollars, repaid on or shortly after the borrower's next pay date. The lender usually collects repayment through a pre-authorized debit or a post-dated cheque rather than through an ongoing relationship. The FCAC's payday loans overview explains how these products work and warns about the cycle of repeat borrowing that can develop when a loan is rolled over (FCAC payday loans overview). Payday lending is regulated by the provinces and territories, and the rules, including the maximum cost of borrowing, differ from one jurisdiction to another.
The federal criminal interest rate
Canada's Criminal Code sets a criminal interest rate. Under section 347, the rate was reduced to 35% per year in effective terms, a change that took effect on 1 January 2025 through the Criminal Interest Rate Regulations (Criminal Code s.347 and the Criminal Interest Rate Regulations). Charging an effective annual rate above that threshold is a criminal offence. Payday loans are generally permitted to exceed the threshold only where they comply with a provincial regulatory regime; outside a compliant regime, the criminal rate applies. That is why the provincial caps below matter so much.
| Province | Maximum cost of borrowing | Source |
|---|---|---|
| Ontario | $14 per $100 advanced | Ontario O. Reg. 475/24 (Ontario O. Reg. 475/24) |
| British Columbia | 14% of the principal | BC Payday Loans Regulation (BC Payday Loans Regulation) |
| Other provinces and territories | See the regulator's current published figure | Provincial regulators; FCAC payday loans overview (FCAC payday loans overview) |
The cost caps matter because they set the legal ceiling, not the typical price. A compliant payday lender can charge up to the provincial maximum, and many do. Because the term is short, the dollar cost can look small while the effective annual rate is very high. That is exactly why the federal criminal rate exists as a backstop, and why the provincial regimes were created to license and limit the industry.
Do payday lenders use co-signers?
Most payday lenders do not require a co-signer, because the business model does not depend on a traditional credit assessment. The lender relies on proof of income, an active bank account, and the borrower's next paycheque rather than on a credit score. In many cases a co-signer would not change the decision at all, because the lender is underwriting the pay cycle, not the person's long-term creditworthiness. Where a co-signer is requested, it is worth asking why, and what specifically the lender expects that person to add.
Why co-signing a payday loan is especially risky
If you do co-sign a payday loan, you are accepting responsibility for an obligation whose cost, measured as an annual rate, is far higher than almost any other consumer credit. A co-signer is normally a joint borrower equally responsible for the full balance (FCAC on joint-borrower disclosure), so a missed repayment can lead to collection activity against both people, and the amount grows quickly when the loan is rolled over. Unlike a car loan, there is no asset behind a payday loan that could be sold to reduce the debt. Unlike a student loan, there is usually no repayment assistance program. The co-signer simply owes the money.
There is also a practical point about who benefits. A payday loan is usually taken to cover a shortfall between income and expenses. If that shortfall is recurring, the loan treats the symptom and the co-signer absorbs the risk without fixing the cause. That is a great deal of exposure for a very small amount of money.
Provincial rules also cover things such as cooling-off periods, limits on how many times a loan can be rolled over, and whether a lender can advance additional funds. These protections exist because repeat borrowing is common. For anyone considering co-signing, the practical question is not only what the loan costs today but what happens if it is rolled over, because each rollover adds cost while the co-signer's liability does not shrink.
Alternatives to a payday loan
- Ask your bank or credit union about a small line of credit or overdraft. The cost is generally far lower.
- Ask the creditor for more time. Utility companies, landlords, and some lenders will negotiate a short extension.
- Use non-profit credit counselling. Free services can help with budgeting and creditor negotiation.
- Check for income supports. Provincial and federal benefits may be available sooner than expected.
- Consider a small loan from a family member instead of a payday loan, with a written plan to repay it.
Common mistakes
- Rolling a payday loan over instead of repaying it, which multiplies the cost.
- Assuming a co-signer will make a payday loan cheaper; the cost is set by the lender within the provincial cap.
- Co-signing without knowing the maximum cost of borrowing in your province.
- Borrowing from several payday lenders at once, which creates multiple debits against one paycheque.
- Ignoring the federal 35% criminal interest rate ceiling when comparing a payday loan with other credit.
Payday loans are legal and regulated, but they are the most expensive mainstream borrowing in Canada. Before anyone co-signs one, the honest question is whether a lower-cost alternative exists — because for most shortfalls, it does.