Week 10: Borrower Beware
MONEY SMART CHALLENGE
Money Smart Weekly Conversation Fact: 89% of people who use payday loans use the loan to pay for basic expenses like rent, car repairs and bills.
(Financial Consumer Agency of Canada’s National Survey of 1500 Payday Loan Borrowers – 2016)
Many people are close to needing a loan to cover necessary expenses and out of desperation are turning to payday loans or their new cousins; instalment loans.
This Marketplace and CBC News investigation Report reveals the true cost of borrowing an Instalment Loan (Aaron Saltzman, CBC News Posted: Feb 27, 2015)
Highlights from the report:
Instalment loans, which are relatively new to Canada, carry rates of interest that can be considered extreme. Offered by companies such as Easy Financial Services Ltd., the loans carry an effective annual interest rate of almost 60 per cent. (CBC)
Aaron Saltzman interviewed Helen Parry who last year, with bills piling up, asked her bank for a loan but was turned down because of bad credit.
She turned to a company called Easyfinancial Services Ltd.
“I was relieved because, you know, I didn’t have any other option at the time.”
She got a loan of $3,100 to be paid back over 18 months. But in doing so, Parry dove into one the fastest growing — and potentially most expensive — types of debt in Canada.
They’re called Instalment loans. They are, in a nutshell, unsecured, high-interest, subprime, short-term loans. Unlike payday loans, which are usually for a few hundred dollars and repaid in a few weeks, instalment loans allow you to borrow up to $15,000 with repayment periods of up to three years.
But like payday loans, instalment loans are aimed at the same general market: people with bad debts and poor credit. They often have lower incomes, are struggling to get by and are less sophisticated financially. In fact, some purveyors of instalment loans are literally setting up shop in many of the same depressed neighbourhoods once populated by payday lenders.
A slippery slope
Easyfinancial Services Ltd. is taking over 47 retail locations across Canada from The Cash Store, an Edmonton-based payday lender that went out of business after it was barred from making new loans in Ontario because of rules limiting interest charges.
A few months after she got her original loan, she got a call from Easyfinancial offering her more money with a longer repayment period. Parry agreed and ended up with a $5,100 loan to be repaid over 36 months. Her semimonthly payment was $186.82, which includes an optional loan-protection Insurance payment of $55.97.
Parry’s loan agreement has the total cost of borrowing expressed as an annual percentage rate (APR) of 46.96 per cent. “The criminal interest rate is anything over 60 per cent,” says Gorham. “They’re very close.”
A debt trap
Marketplace interviewed a former employee of Easyfinancial. “I don’t think anyone really understood. All they wanted was the money and they wanted it quick. And then you pay and you pay and you pay and you pay,” says the former employee. She says sales reps, who receive a commission, would call customers offering more money.
“You wouldn’t finish paying off your first loan but you’ve made so many payments, now you qualify for more money. So you would add to that loan. Then you just roll it over.”
She says it bothered her so much, she quit.
“I would come home every day very depressed. Like, just felt like we were stealing from people.“
When Helen Parry was unable to make the payments on her loan from Easyfinancial, she went to Credit Canada Debt Solutions. If you cannot make the payments on an installment loan or payday loan and need help, Call 1-800-267-2272 or visit their website https://creditcanada.com/debt-consolidation-edmonton
They got her a new interest rate for her instalment loan: 9.99 per cent. That, she says, is a rate she can afford.
To read the full report go to http://www.cbc.ca/news/business/instalment-loans-the-new-high-interest-danger-for-consumers-1.2971067
PAYDAY LOANS are much more expensive than other forms of credit.
Also, Payday lenders may ask you to take your loan in the form of a prepaid credit card. This can make the loan even more expensive because you may be charged additional fees to activate and use the card. If you are unable to pay your loan back on time, you may be charged additional fees. Payday loans are different from other forms of credit because paying them back on time will not improve your credit score.
Before you sign up for an Installment Loan or a Payday Loan, ask yourself…
1.Do I really need this money? Is there any way that I can manage until my next payday and avoid taking out this loan? For example, could I call my creditor and ask for additional time to pay the bill, or put off some purchases until after I get paid?
2.Have I considered cheaper alternatives to the payday loan, borrowing money from friends, getting a pay advance from my employer or one of the options below?
Line of credit—This is a loan offered by a financial institution that allows you to withdraw cash whenever you want, up to a certain credit limit. You are charged interest on the amount until you pay it back in full.
Overdraft protection—This allows you to withdraw money from your bank account even if your balance is zero. You pay interest on the money you’ve taken out from the day you take it until you pay it back in full.
Cash advance on a credit card—When you get cash from an automated bank machine (ABM) or bank using your credit card, this is a cash advance. You start paying interest the money right away, but the rates are still much lower than payday loans.
3.Do I understand the total cost of the loan, including all interest and fees, and how much I will be charged if I don’t pay it back on time? Read the loan agreement carefully before signing it. Keep a copy for yourself so that you have something to refer to if there is any problem with the loan.
4.Am I sure that I will be able to pay the loan back on time from my next pay cheque? If not, taking a payday loan will make your financial situation worse. Don’t forget that you will still need to pay all of your normal expenses from your next pay cheque, and you’ll have less money once you pay the fees for the payday loan.
5.Am I regularly having trouble making ends meet? If so, a payday loan will not solve your problems. Consider booking an appointment with a credit counselling organization. Credit counsellors can help you deal with your debt and talk to your creditors for you.
Credit Canada Debt Solutions Call 1-800-267-2272 or visit their website https://creditcanada.com/debt-consolidation-edmonton
Credit Counselling Society Call 1-888-527-8999 or email firstname.lastname@example.org
This information was taken from the booklet Payday Loans: An Expensive Way to Borrow created by the Financial Consumer Agency of Canada.
To read the whole booklet, download this file. PaydayLoans-eng
DEALING WITH THE UNDERLYING PROBLEM
There is usually an underlying problem that is the cause of ongoing financial difficulties and debt. Financial problems can be a symptom of a bigger issue. To come up with financial solutions that will work for the long term, you may need to deal with the underlying problem that is causing your financial difficulties.
Here are some common ones and some local organizations you could contact for assistance in dealing with them:
• Sudden unemployment or lower than usual income due to being laid off, fired or quitting a job.
Alberta Works and Income Support: 780-608-2525
Directions for Wellness: 780-672-3399
Service Canada: 780-679-5035
Camrose Adult Learning Council: 780-672-8754 Resumes, Career Planning, GED Certificate, Academic Upgrading, English Language Training, Work skills and Computer Training
Business IQ: 780-672-2672
• Unexpected illness or accident resulting in not being able to pay your bills or loans.
Service Canada: 780-679-5035 (Canada Pension Plan Disability)
Alberta Works and AISH: 780-608-2525
• Moving out on your own and being used of a higher standard of living that took your parents decades to achieve.
• First baby is born and parents didn’t budget for the increased expenses and the drop in income during maternity leave.
• Divorce or separation and can’t afford the ongoing expenses on only one income or there are leftover bills to deal with.
• Retirement and now you are cash poor.
Your Bank’s Investment Advisor
• Emotional attachment to something you are not willing to part with but can no longer afford. (a home, business, vehicle, toy)
• An addiction (gambling, tobacco, alcohol, drugs) which is making it difficult for you to maintain employment or make financial decisions in your best interest.
Alberta Heath Services Community Addiction & Mental Health: 780-672-1181
Alcoholics Anonymous: 780-679-0696
Narcotics Anonymous: 780-672-7300
Addictions Helpline: 1-866-332-2322
• A mental illness which is making it difficult for you to maintain employment or make financial decisions in your best interest.
Alberta Heath Services Community Addiction & Mental Health: 780-672-1181
Canadian Mental Health Association: 780-672-2570
START the MONEY SMART CHALLENGE TODAY by ANSWERING this QUESTION:
Money Smart Week 10 Question: Which underlying problem did you discover which could be the cause of your financial difficulties? What might be the first step towards dealing with this underlying problem?
Now, What Do I do?
Email your answer to the Money Smart Week #10 Question and your full name and mailing address to email@example.com
Your name will automatically be entered into a draw for a Samsung Galaxy Tablet. (a $300 Value!)
You can enter your name once each week for a total of 17 chances to win! Answer the question anytime before the end of the Challenge on May 28, 2017 and your name will be entered into the draw for a Samsung Tablet.
So, If you missed answering any of the questions for the previous week, go to those weeks and answer the question(s) now.
(NOTE! Only residents of City of Camrose and Camrose County are eligible for the draw for the Samsung Galaxy Tablet.)