Do high-interest loans and credit products help you improve your financial situation? Advertising might lead you to believe so. There are quite a few companies right now with TV and radio ads saying their loans to consolidate your debts, do major repairs, etc. will help reduce your stress and improve your credit score. But are they in your best interest? Will these loans help you move forward financially in a positive way? The answer is NO and here's why.
Easy Money to Get, Might Be Hard to Pay Back
There are payday lenders and second-tier lenders that promise quick and easy approvals for almost anyone, but that should be a red flag. Their interest rates will be a lot higher than a bank’s loan interest rates. They may say they don’t do a credit check – another red flag. This indicates they are willing to take higher risks, and who pays for it? You, because you will be charged higher interest rates. Higher interest means higher payments and/or longer term loans and this will cost you a lot more money.
Using Your Home as Security on a Loan is a Huge Risk
Some companies may advertise you can get money from your home regardless of age, income or credit history. But wait a minute—that means they will have access to your home if you continue to have financial problems and default on this new loan. You need to decide if a secured loan at 19.99% or higher is the solution for getting back on track. Otherwise, you could be putting your home ownership in jeopardy. And a foreclosure stays on your credit file for 6 years.
Lenders Offering Easy Loans Will Cost You More
It seems like more and more companies are promoting high interest products as fast and convenient alternatives to more traditional lenders, like banks and credit unions. But it doesn’t make sense to take on an unsecured loan at 39.99% to pay off your credit card debt, which has an interest rate of 19.99%. It makes more sense to explore other options that don’t include taking on new debt. Talk to your current credit provider and see what solutions they may be able to offer you. Maybe they can give you a credit card with a lower interest rate or maybe they can consolidate your debts into a loan at bank rates.
The Real Cost of High Interest Loans
High interest loans end up costing consumers a lot more than they realize. For example, one popular lender charges an annual percentage rate (APR) of approximately 47%. And the best part? They charge all of the interest for the full loan period upfront.
One example: A loan of about $4,500 over a loan period of 36 months or 3 years ended up costing the consumer about $4,000 in interest, which was immediately added to their total loan amount right off the bat, for a total loan amount of $8,500.
Another example: A loan of $9,850 over a loan period of 48 months or 4 years ended up costing another consumer just over $12,000 in interest, for a total loan amount of $21,895.
And if you can’t keep up with payments, that amount goes up. Paying an extra $4,000 to $12,000 just on interest is a tall order for anyone, let alone for someone who is struggling financially. There are better alternatives.
People Are Desperate For Money which Leads to Poor Decision-Making
People want or need money and they want it now. As a result, they don’t take the time to shop around and compare and they don’t look at what the total cost will be. For example, a $300 payday loan for 14 days would cost you $45-$75 (depending on the province you live in) while a credit card cash advance of $300 for the same 14 days would cost you about $8. If you need money fast for a short period of time, consider taking a cash advance on your credit card or going into overdraft on your bank account. But remember, you want to pay these off as quickly as you can.
How to Improve Your Credit Score
“If a bank sees that you have recently been applying for payday loans or similar types of financing, it can keep you from being approved by major lenders. Banks would see those applying for payday loans as not being in control of their finances, and it can raise a red flag on your file.”
To improve your credit score, you need to get up to date with your payments and stay up to date and you need to get your credit balances below 50% of your credit limit. This will help to improve your credit score.
More Credit Is Not the Answer
It's not about how much money you have, but how you manage the money you have. You need to be in control and plan how to spend your money to meet your monthly expenses, including your debt payments. That means having a budget or spending plan. Taking on new, high-interest debt will likely just bury you even deeper because not only will you have this new loan to pay back, but also all of your regular monthly expenses. It is extremely difficult to catch up once you’ve taken on a high-interest loan due to the interest, as well as keeping up with your regular expenses, which don't stop.
Contact Credit Canada for Debt Help
Give us a call at 1.800.267.2272 and book an appointment with one of our certified Credit Counsellors. All of our counselling is free, so it really is in your best interest to get professional advice before taking the plunge and taking out a high-interest loan. Let us help you explore other options available for getting you out of the debt cycle.