Not all loans are created equal. More and more Canadian lenders are pitching super high interest loans as fast, convenient alternatives to traditional lending products, when in fact they’re vastly more expensive.
Baiting unsuspecting customers with access to easy cash and a solution to all their financial woes, these virtual lenders vilify “archaic” banks and “high-interest” credit cards. However, once the trap has been sprung, they offer loans that are double to TWENTY times the cost of a credit card!
In Canada, section 347 of the Criminal Code makes it a criminal offence to charge more than 60% interest per year. But that hasn’t stopped our politicians from offering high interest lenders a convenient exception (what’s that about?) – allowing them to charge over 500% interest per year!
Whether you’re looking for a little extra cash, need money for an emergency or are looking to lower the cost of your current debt, you need to be extra vigilant to ensure you don’t get fooled into a government approved debt trap. We’re going to show you some of the loans you should desperately try to avoid, and a few much cheaper alternatives you might want to explore.
MoneyMart and CashMoney makes it a habit of providing payday loans at the absolute highest allowable effective interest rate permitted by each province. That said, so do most other payday lenders.
So what does that mean for you? For residents of British Columbia the effective simple annual interest rate on a $300 loan originated in a MoneyMart branch for 14 days is 599.64%!!! For residents of Ontario the simple APR on a $300 loan for 14 days is 548%!!!
To be clear, that is only the simple annual interest rate. The effective annual interest rate is 14,299% (fourteen thousand, two hundred ninety nine percent). The difference between the simple and effective annual interest rate is the compounding effect.
To get a sense in dollars of how much you would owe with a payday loan versus a credit card cash advance at 24% interest, let’s take a look at the following example:
|Payday Loan||$300||14 Days||$63|
|Credit Card Cash Advance||$300||14 Days||$8 ($3 Interest + $5 fees)|
Here’s the funny thing about payday loan borrowers, all have a bank account and all have a job. So why do they end up using payday loans? Because most are simply drawn in by the convenience, without fully appreciating the cost.
Hopefully you can now appreciate the cost and realize just how expensive these loans are. You can’t put lipstick on a pig, so regardless of the marketing spin, avoid these loans at all cost.
High Interest Lines of Credit and Installment Loans
Mogo oozes bluster, but it’s only skin deep. With catch-phrases like “getting screwed by your credit card?”, “get protection at Mogo.ca”, “loans designed to help you get out of debt faster” and “the anti-bank”, you would think Mogo had your back ,right? Wrong – in our opinion anyways.
In fact, Mogo’s mini line of credit comes with an interest rate of 47.7%! Exactly how does that beat a credit card with a 19.99% interest rate on purchases and a 24% APR on cash advances? It doesn’t.
Mogo disingenuously states “You may not know it, but credit cards’ super low minimum payments don’t pay off much of the principal, which can keep you in debt for decades. MogoMoney’s loan terms are designed to get you out of debt in five years max. That makes your total cost of borrowing with Mogo a fraction of what you’d be paying—even at the same rate as a credit card.”
Talk about being disingenuous. Guess what, you have a choice to pay more than your credit card’s minimum payment (and you always should). In fact, if you paid the same dollar amount each month to your credit card, as you did to your MogoLiquid installment loan which can charge as much as 45.9% APR, you’d pay off your credit card nearly TWICE as fast!!!
Mogo should always be considered a lender of last resort. If you’re feeling overwhelmed with credit card debt, before going to Mogo, see if you can consolidate your debt onto one of the many 0% balance transfer credit cards, or call your credit card company and see if they can reduce your interest rate or adjust your repayment terms (yes, that’s a thing).
What To Do If You Need Cash Fast
If you need access to cash quickly, consider a credit card cash advance. While it is expense, typically with a flat fee of around $5, plus interest of around 24% from the time of withdrawal, it is much, much cheaper than any payday loan, where interest rates run as high as 599%!
If you don’t have a credit card, consider going into overdraft with your checking account. Again, while not ideal, if you don’t already have an overdraft plan, RBC would only charge $5 per overdraft handling plus an interest rate of around 22%. You can also get overdraft protection for $4 a month.
Lastly, if the cash you’re looking for is not for an emergency, and you don’t have access to a credit card or overdraft protection, consider passing on the purchase completely.
What you may not know, is that some lenders will look upon any payday loan as a reason not to approve you in the future. So even though you may have paid it back on time, the very fact that you have a payday loan in your credit history can count against you.
That said, if you absolutely need the money, because you have to pay a speeding ticket, that if not paid, means your car’s registration will be suspended, and you won’t be able to work, then a payday loan may be a reasonable decision, after all other avenues have been exhausted.
What To Do If Your Credit Card Application Was Rejected
If your credit card application was rejected, and you need access to credit, there are alternatives to payday loans and high interest installment loans. Just because you weren’t approved by RBC, doesn’t mean you won’t be approved enywhere else.
Canada is starting to see the emergence of unsecured credit cards for bad credit. Companies like Affirm Financial, offer an unsecured MasterCard (no security deposit required) with credit limits up to $3,000, designed for people who have recently emerged from bankruptcy and consumer proposal, and also for those with impaired credit scores.
While interest rates for the Affirm MasterCard are higher than traditional credit cards, at 29.99% for homeowners and 34.99% for non-homeowners, they’re much more reasonable the 599% APR’s found on payday loans and 47.7% APR found on Mogo’s line of credit.