Pros and cons of payday loan alternatives
With household debt hovering around historic highs, cash flow crunches have become the norm for many Canadians, and loans are common solutions. A number of financial service providers are launching products that compete with payday loans and are reshaping the market for fast-cash borrowing, both long- and short-term.
Most of these services, while cheaper than payday loans, still have high costs and should only be used when no other options are available. You'll need to not only compare advertised rates, but also thoroughly research any fine-print fees that can multiply loan costs.
Payday loan costs versus newer product costs
One common criticism of payday loans is their high cost. Six provinces have passed laws capping payday loan charges, but they are still high on an annualized basis. Nova Scotia limits fees to $25 per $100 lent; Alberta, British Columbia and Saskatchewan cap them at $23 per $100; Ontario's top rate is $21 per $100; and Manitoba's is $17 per $100. Canadian Payday Loan Association President Stanley Keyes says while these charges may seem high, payday lenders have to cover business expenses plus risks of loan non-repayment.
Below is a key feature comparison of a 14-day, $300 loan in B.C. from Canada's largest payday lender, Money Mart, versus alternative financing options:
|$300 loan for 14 days in B.C.|
|Short-term product||Cost per $100 lent||Annualized rate
|Money Mart Payday Loan
||$23||599.6%||$120 to $1,500
||7 to 42 days
|Wonga Online Cash Advance
||$10||261%||$100 to $600
||1 to 45 days
|Mogo Online Loan
||$1.83 to $11.50||4.79% to 299.8%
||$100 to $2,500||Up to 1 year
|Vancity Fair & Fast Loan
||$0.73||19%||$100 to$1,500||Up to 2 years|
- Mogo and Wonga are internet lenders that sell alternative loan products to residents of Alberta, B.C. and Ontario. Mogo offers a full spectrum of unsecured loans to applicants with good or bad credit, including cash advances and lines of credit. Mogo rates depend on your assessed creditworthiness.
- Wonga cash advances are limited to $600 for first-time borrowers, but can increase to $1,500 if you consistently repay on time. Rather than requiring you to borrow a defined amount for a set period, Wonga calculates charges using a sliding scale based on the number of days you borrow. For example, a $300 cash advance to a B.C. resident for 1 day costs $3, $30 for 14 days, and $69 for 45 days.
- Vancity is a community-based credit union for B.C. resdients. Vancity's Fair & Fast Loan is a payday loan alternative that you can repay early without penalty. Fair & Fast Loans require a minimum $5 share purchase for credit union membership and may take longer to process than online lenders. Spokesperson Lorraine Wilson says that all members qualify for the 19 per cent APR with no differentiation by their credit rating.
Credit file considerations
Payday lenders generally do not report to the credit bureaus. However, Paul Lefevre, operations director for Equifax Canada, says that may change as the payday loan industry continues to grow.
- Mogo does not report its smaller online loans to the credit bureaus, but does use an in-house program called Level Up to monitor its customers' payment histories. If you consistently repay your loan on time, you are rewarded with lower rates on future loans.
- Wonga claims to report its online cash advances to both Canadian credit bureaus for amounts as small as $100. Public relations manager Nuala Ryan says Wonga also has its own internal Trust Rating, which determines the available limit for each customer; however, rates remain the same regardless of their rating.
- Vancity's Wilson says Fair & Fast Loans can help you strengthen your credit profiles. However, a note on Vancity's website says loans repaid earlier than the two-month minimum term may not significantly improve your credit history, as credit bureau reports are built over time.
Longer-term loan options
Payday loans have become notorious debt traps because borrowers facing unanticipated expenses or low income often have a hard time repaying on time. They then end up borrowing even more and can end up owing many times more than they amount they originally needed.
Paul Bowles, professor of economics at the University of Northern British Columbia, says the alternative lenders pose similar problems.
One longer-term option is a debt consolidation loan with a longer payback period.
- Mogo recently introduced loans for up to $25,000 for five years, with APRs starting at 6.9 per cent. According to Mogo.ca CEO David Feller, these loans are credit-reporting, so they will help build up your credit score if you pay on time.
presents another alternative called urLoan, which caters to those unable to
borrow from banks because of bad credit. Maximums range from $1,000 to $15,000 and
must be repaid within 36 months; annual interest rates range from 29 per cent
to 46.95 per cent.
There is a catch, however. Loan protection insurance is mandatory for every urLoan, and those premiums are tacked onto the loan's monthly costs.
"When an insurance policy is added onto the amount you borrow on a term loan, the consumer ends up paying interest on the insurance policy," notes Scott Hannah, president and CEO of the Credit Counselling Society.
Deciding if these alternatives are right for you
Before choosing any financing option, Hannah recommends seeking guidance from a trusted source, such as a family member or friend, your financial institution or an accredited agency non-profit credit counselling agency.
"By stepping back and getting help to look beyond the immediate crisis, better decisions are made," says Hannah. "Going to an alternative lender may cause a consumer's situation to go from bad to worse."
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