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Instalment Loans: The Newest Threat to Canadian Consumers

Posted by Auto Loan Solutions

Over the last year, car loan debt has risen at significantly faster rates than normal – 20% to be exact – making it the fastest growing type of debt in Canada.

In fact, as reported by the Bank of Canada, auto loan debt has essentially doubled over the last eight years, at over $120 billion today. If you’re currently struggling with debt, click here for some helpful money-saving tips.

This new trend can be accredited to riskier new auto loans being promoted by major banks like CIBC and TD, who are offering lengthier auto loan terms on “flashy” new cars to consumers with lower interest rates. “Low monthly payments facilitated by low interest rates and longer amortization periods are encouraging consumers to purchase more expensive vehicles,” explains a report from Moody’s Investor Services.

As we’ve mentioned in the past, however, taking these types of loans are not ideal for consumers with poor credit, as they usually entail buying a brand new, pricier vehicle on an eight-year term. Coincidentally, the second fastest-growing type of debt in Canada, instalment loans, also seems to be detrimental to consumers with a poor credit rating.

Instalment Loans: Canada’s Most Expensive Loan

According to CBC, instalment loans in Canada have been skyrocketing recently, with a total of $132 billion owed – 8.7% of Canada’s total debt distribution, the majority of which is held by major banks.

On a mission to decipher the potential repercussions of taking out an instalment loan, CBC interviewed several Canadians with bad credit who, after being turned away from banks, turned to other lenders with hopes of obtaining a loan.

However, the loans some of them received were on the border of being criminal, with interest rates at nearly 60% .

Instalment loans are still relatively new to Canadians, meaning that most consumers are unaware of the terms that come alongside it. And, with an overwhelming 66% of Canadians reported to believe they are “financially literate” when they are far from it, it’s no wonder why this type of high-interest, subprime, unsecured, short-term loan has been gaining traction.

CBC News spoke to one Canadian who took out an instalment loan, a 57-year-old grandmother by the name of Helen Parry. After being turned down by the banks due to her poor credit score, Parry went to a company called easyfinancial Services Ltd., which offers annual interest rates of almost 60%.

Despite the ghastly size of the interest rates, Parry was “relieved because, you know, I didn’t have any other option at the time.”

As opposed to payday loans, which are typically for a few hundred dollars and are repaid within weeks, instalment loans allow you to to borrow up to $15,000 over a period of three years – however, the consequences of taking out such a loan can be dire, with experts agreeing that it’s potentially the most expensive loan in the country.

For Parry, for example, borrowing $5,100 from easyfinancial, including interest and insurance, meant she’d end up paying $13,400 over three years, well over double the price of her loan. She was informed, reports CBC, that her annual percentage rate on the loan would be a whopping 46.96%. But according to Peter Gorham, an actuary who provides certification on when interest rates become criminal, Parry’s annual interest rate was really at 57.12%.

“The criminal interest rate is anything over 60 per cent,” Gorham explains to CBC. “They’re very close.”

Furthermore, a former employee at easyfinancial told Marketplace that most of their customers didn’t “comprehend” the terms, or the costs, of borrowing from them. “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,” the former employee said.

According to Scott Hannah, President and CEO of Credit Counselling Society, “for many people, they get stuck in this cycle not for just years but decades.”

Get Your Credit Back in Shape

Finding yourself with a poor credit score is actually much more common than you’d think. Whether you’ve lost a job, been through a bad divorce, were forced to declare bankruptcy, or have found yourself with tremendous debt that you can’t pay off, your credit rating has taken a hit, and consequently, you’ll be subjected to higher interest rates. We’ve all been there. With hindsight being 20/20, instead of making regrets, make changes so that you’ll NEVER be put into a position where you’d have to take an instalment loan, and get on the path to reestablishing your credit, TODAY.

1. Take Out An Auto Loan on a vehicle that suits both your financial, and personal, needs. Many people don’t know that this is actually the optimum way to show lenders you are trustworthy, by paying back an auto loan responsibly and on time. Make sure to research cars, which ones have the best resale value, etc., and then apply online at Auto Loan Solutions. One of our specialists will be in touch within minutes to go over a plan that will have you pre-approved for a loan, and in a car within 48 hours. Furthermore, they’ll coach you on good credit-building practices, like refinancing the terms of your loan, so you can get your credit back in shape.

2. Pay Your Bills On Time! Speaking of credit building practices, this is absolutely crucial if you’re trying to strengthen your credit so you can be eligible for the best terms on loans. Set up reminders, or automated paying systems, and try to pay more than the minimum amount if possible.

3. Make A Budget. If you follow a carefully thought-out budget plan, one that incorporates all of your monthly expenses and bills, and even cuts down on a few luxury items, then you should be able to get out of debt, pay your bills on time, and be on the fast track to financial freedom.