When you’re drowning in unsecured debt, any seemingly “quick fix” can be incredibly appealing. When you’ve tried everything you can do, the budget isn’t enough, and the extra income can’t help you make a dent, it’s easy to feel helpless. This is why many debtors are attracted to applications for short term loans.
At first, these loans seem like the perfect solution. All you need to do is apply for a payday loan, installment loan, or debt consolidation loan and use the borrowed funds to pay off your other creditors. Before you know it, you will be completely debt free! At least, that’s what the loan providers want you to think.
Unfortunately, this is not quite what happens when you opt for these high priced loans in the form of sky high interest rates.
“There’s a lot that third-party lenders won’t tell you,” says Richard Sklar, Chartered Insolvency Restructuring Professional and Licensed Insolvency Trustee at David Sklar & Associates. They might hide or downplay any issues you might have with the loan so that you feel more comfortable accepting it.
It is important to know what really This happens when you try to use high interest loans to pay off your debts, especially because there are more beneficial alternatives that you can try instead.
The Truth About High Interest Loans
The truth is, there are several common types of high interest loans designed to appeal to people struggling with debt. These are payday loans, installment loans, and debt consolidation loans.
- Payday loans are short-term, high-cost loans that are due when you receive your next paycheck. Some provinces give you up to 62 days to reimburse them. Lenders can only offer borrowers a maximum of $ 1,500, which is why payday lenders tend to attract people who are on tight budgets and need quick cash to pay for small emergencies like repairs. car or missed bills.
- Installment loans are amounts borrowed (the “Principal”) that you must repay over a specified period of time (the “Term”) according to defined payment periods (the “Installments”). Each payment includes the repayment of a portion of the principal, an amount for the interest charged on the loan, and an amount for any other fees charged by the lender. The higher the interest rate, the longer the loan term and the additional fees for things like loan insurance and loan fees, the higher your cost of borrowing – “what you pay more than what you borrow “.
- Debt Consolidation Loans are a specific type of installment loan used for the purpose of paying off a combination of other smaller debts. You would use this type of installment loan to reduce your number of monthly payments, giving yourself only one big payment to cover once a month. For a consolidation loan to be an effective solution, the interest rate and any other cost of borrowing should be lower than the combined cost of borrowing of the debt it replaces. Otherwise, you can reduce the number of monthly payments, but you can increase the amount you have to pay on a monthly basis.
“While the idea of getting a high-interest consolidation loan to quickly pay off debt might sound like a good idea, it is a short-term quick fix with long-term negative effects,” explains Richard Sklar.
These loans seem like quick, easy, and cheap solutions, but the truth is, they are none of those things. You are likely to spend more time and money covering these loan payments than if you had decided to fix your financial problems on your own. Much of this is due to one reason: their exorbitant interest rates.
To get an idea of interest rates, the average credit card interest rate is 19% and the average personal line of credit interest rate is between 3% and 5%. With debt consolidation loans, however, lenders charge borrowers interest rates that reach almost 60 percent – that’s the country’s legal limit. Worse than that, payday lenders can avoid this rule altogether. They often charge interest rates of 400% or even more when you miss a payment. These lenders continue to charge you these exorbitant rates, while Canada is experiencing historically low interest rates at the Bank of Canada.
So even if your initial loan is small and reasonable, the high interest will make it almost impossible to repay immediately. The amount can quickly swell and it will become more and more difficult to manage over time. You will be in a perpetual repayment cycle, which is why high interest loans are often referred to as debt traps. Once you get in there, you might not get out of it.
Consumer proposals and better debt solutions
The good news is that there are much better ways to get out of debt, such as consumer proposals. A consumer proposal is a legally binding agreement between a debtor and its unsecured creditors, under which the debtor agrees to pay a portion of its total debts. After completing the proposal, their debts to unsecured creditors will be considered fully paid. This financial burden is officially on their shoulders.
A consumer proposal will cost you much less than a high-interest loan because it only requires you to pay your creditors a portion of your unsecured debt. You could reduce what you owe by up to 80 percent.
And the interest? When a consumer proposal goes into effect, all of your unsecured creditors must suspend interest on your accounts. The amount you owe will not increase as you try to repay it, and you will not be stuck in a perpetual repayment cycle.
Another reason for choosing a consumer proposition is that consumer proposal services are performed by Chartered Insolvency Trustees (LITs). IADs are licensed and regulated by the Canadian government. They are subject to the control of the Office of the Superintendent of Bankruptcy to ensure that their services and fees are fair, ethical and efficient. Their goal is not to get as much profit as possible from you, but to free you from your debt so that you can gain financial security.
This is why your first consultation with a SAI is completely free. During this consultation, a trustee will assess your financial situation to see if a consumer proposal is the right debt relief strategy for you. They will tell you which solution is the best, even if it is not one of the services they can offer you.
On the other hand, providers of high interest loans are not subject to the same level of scrutiny and they are not obligated to give the same impartial advice. If a provider thinks you would be a profitable customer, they will try to convince you to take out a loan, even if it is not in your best interest. They may make false or misleading claims about government regulated services, such as consumer proposals, to dissuade you from signing up.
Bankruptcy as a last resort
The reality is, you may not be eligible for a consumer proposal. If this happens, you should talk to a Licensed Insolvency Trustee about personal bankruptcy. Bankruptcy is a debt solution that is often seen as a last resort for Canadians struggling with insolvency. This is because debtors may lose some assets during the process and bankruptcy will show up on their credit report years later.
Having said that, personal bankruptcy can still be a better option for debt relief than high interest loans. Once you receive an official discharge, you will be released from all your debts. Loans cannot guarantee these results.
David Sklar & Associates Licensed Insolvency Trustees Can Help
If you are struggling with debt and are desperate for a way out, the Licensed Insolvency Trustees at David Sklar & Associates can help. Our Trustees have helped countless Canadians solve their debt problems with honest, transparent and effective solutions.
We offer debt solutions throughout the Greater Toronto Area in Toronto, North York, Downward view, Brampton, Hamilton, Mississauga, and Pickering. Contact us today to book your free consultation. The decision could change your life!
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