Installment loans, the new danger of high interest rates for consumers

At a time when she is expected to approach her golden years, 57-year-old grandmother Helen Parry is instead taking care of two grown children with a salary that has not increased for eight years.

“The cost of living is going up, but not the salary and utilities and everything is going up… so it gets harder and harder every year,” says Parry.

Last year, as bills piled up, Parry, who lives in Brampton, Ont., Applied for a loan from her bank, but was turned down due to bad credit.
Installment loans, which are relatively new to Canada, carry interest rates that can be considered extreme. Offered by companies such as easyfinancial Services Ltd., the loans carry an effective annual interest rate of nearly 60 percent. (SRC)

She turned to a company called easyfinancial Services Ltd.

“I was relieved because, you know, I had no other option back then.”

She obtained a loan of $ 3,100 to repay over 18 months. But in doing so, Parry plunged into one of the fastest growing – and potentially the most expensive – types of debt in Canada.

These are called installment loans. These are, in a nutshell, unsecured, high interest, risky, short term loans.

CBC Hidden Camera Investigation Marlet helps to expose how expensive these loans can be.

Unlike payday loans, which typically cost a few hundred dollars and are paid off in a matter of weeks, installment loans allow you to borrow up to $ 15,000 with repayment periods of up to three years.

But like payday loans, installment loans are aimed at the same general market: people with bad debt and bad credit. They often have lower incomes, struggle to cope, and are less financially sophisticated.

In fact, some installment loan providers are literally moving to many of the same inner city areas once populated by payday lenders.

A slippery slope

Easyfinancial Services Ltd. acquires 47 retail outlets across Canada from The Cash Store, an Edmonton-based payday lender that closed after being banned from making new loans in Ontario over rules limiting fees ‘interest.
Helen Parry borrowed $ 5,100 from easyfinancial Services, to be repaid over three years. But under the terms of the loan, including interest and insurance, she would have ended up repaying $ 13,400. (SRC)

Although they are not as high as payday loans, installment loans also carry interest rates which can be considered extreme.

Take Parry. A few months after getting her initial loan, she received a call from easyfinancial offering her more money with a longer repayment period. Parry agreed and ended up with a loan of $ 5,100 to repay over 36 months. Her bi-monthly payment was $ 186.82, which includes an optional loan protection insurance payment of $ 55.97.

Parry’s loan agreement has a total cost of borrowing expressed as an annual percentage (APR) of 46.96 percent.

But Peter Gorham, an actuary who provides criminal interest rate certification, calculated Parry’s effective annual interest rate to be 57.12%.

“The criminal interest rate is over 60%,” says Gorham. “They are very close.”

Easyfinancial told Parry that the total obligation for the term of the loan would be $ 9,521.90. But under the Consumer Protection Act, easyfinancial only need to include principal plus interest in the cost of borrowing disclosure.

If you include the insurance payment, at the end of the 36 months Parry would have reimbursed a total of over $ 13,400.

Legally, insurance payments are not included in the calculation of interest, but if you had to take this into account, Gorham said, the effective annual interest rate would be 120.3 percent.

Customers often don’t understand

A former easyfinancial employee, who did not want her identity revealed, said Marlet Easyfinancial customers often don’t understand the cost of borrowing.

Marketplace has investigated how easyfinancial Services is ahead of the actual costs of its loans. Installment loans are one of the fastest growing types of debt in Canada. (SRC)

“I think no one really got it. All they wanted was money and they wanted it fast. And then you pay and you pay and you pay and you pay,” says the former employee. .

She says the sales reps, who receive a commission, would call customers offering more money.

“You wouldn’t have finished paying off your first loan, but you’ve made so many payments that you are now eligible for more money. So you would add to this loan. Then you renew it. “

She says it bothered her so much that she quit.

“I would come home every day very depressed. Like, I just felt like we were robbing people.”

In a statement to Marlet, Jason Mullins, executive vice president of easyfinancial, said: “Ninety-five percent of our clients rate their experience with easyfinancial as good or excellent. Your story is based on a few negative anecdotal examples that represent a small number of our clients.

A debt trap

Debt counselors, however, say high interest rates and refinancing options like those offered by easyfinancial can be devastating.

“For many people, they get stuck in this cycle not for years but for decades,” said Scott Hannah, President and CEO of Credit counseling company.

Installment loans have been around in the United States for decades, but they are relatively new to Canada.

And yet Equifax, a credit monitoring company, says installment loans are the second fastest growing type of debt in Canada, behind only auto loans. Installment loans now represent a total of $ 132 billion owed, or 8.7% of Canada’s total debt distribution.

The vast majority of this sum is held by the big banks.

Alternative lenders claim their share of the installment loan market in Canada is around $ 2.5 billion.

Numbers game

Urloan of Vancouver, one of these lenders, offered his website a loan of $ 15,000 payable in 36 monthly installments of $ 858.80.

“I have analyzed this loan and have determined that the effective annual interest rate contained in this particular agreement is 71.26%,” said actuary Jay Jeffrey.

Urloan says it was a mistake.

“The calculator on our website is definitely wrong,” says Ali Pourdad, President and CEO of Creditloans Canada Financing Ltd., Urloan’s parent company. “I think you’ve discovered a much higher payout than what we’re actually charging.”

Pourdad says Urloan’s loans have an APR of 46.9 percent, which he says equates to an effective annual interest rate of 58.5 percent, just below the legal limit of 60 percent. hundred.

“Yes, they are high,” said Pourdad.

“Unfortunately, we have to charge these rates. It has nothing to do with 59.9, 59.8, it’s the fact that we are taking a huge risk. And also, we have to borrow at higher rates because we’re a high-risk lender. “

Other options

Pourdad says his business helps people who wouldn’t qualify for a bank loan by getting them out of financial hardship through debt consolidation.

“They go from not paying the bills to paying them. That’s where we come in,” explains Pourdad.

But critics say that consolidating debt into one loan – often at a higher interest rate – is usually not the best way to go.

“If they fall behind on these loans, consolidation loans is like falling behind on any other loan, you will end up being sued for the balance and get calls from collection agencies,” explains John Lawford, from Public Interest Advocacy Center.

It’s best, Lawford says, to go to a credit counseling service, which can often negotiate a lower interest rate.

That’s what Parry did.

Unable to make the repayments of her loan with easyfinancial, she went to Credit Canada Debt Solutions.

They got him a new interest rate on his installment loan: 9.99%.

This is, she says, a rate that she can afford.

Watch the Marketplace survey on Uneasy Money Friday at 8 p.m. on CBC Television.

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