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Month: August 2016

Why the Ontario Government Didn’t Come Down Hard Enough on the Payday Loan Industry

Reading time: 6 minutes

Gavel with books to indicate legal procedure regarding payday loans

Payday loans are a problem. The interest rate charged is massive. In 2016, payday lenders in Ontario can charge a maximum of $21 on every $100 borrowed, so if you borrow $100 for two weeks, pay it back with interest, and then repeat that cycle for a year, you end up paying $546 on the $100 you borrowed.

That’s an annual interest rate of 546%, and that’s a big problem but it’s not illegal, because although the Criminal Code prohibits loan interest of more than 60%, there are exceptions for short term lenders, so they can charge huge interest rates.

Note: the maximum cost of a payday loan was updated in Ontario to $15 per $100.

The Ontario government knows this is a problem, so in 2008 they implemented the Payday Loans Act, and in the spring of 2016 they asked for comments from the public on what the maximum cost of borrowing a payday loan should be in Ontario.

Here’s my message to the Ontario government: don’t ask for my opinion if you’ve predetermined your answer. It would appear that the provincial government had already decided that, to them at least, the solution to the payday loan problem was simple: reduce the rate that payday lenders can charge, so that’s all they are doing.

Maximum Cost of Borrowing for a Payday Loan To Be Lowered in Ontario

In a letter released on August 29, 2016 by Frank Denton, the Assistant Deputy Minister of the Ministry of Government and Consumer Services announced that they are lowering the borrowing rates on payday loans in Ontario, and we all have until September 29, 2016 to comment. It’s interesting to note that this wasn’t important enough for the Minister, or even the Deputy Minister to comment on.

Under the proposed new rules, the maximum a payday lender can charge will be reduced from the current $21 per $100 borrowed to $18 in 2017, and $15 in 2018 and thereafter.

So to put that in perspective, if you borrow and repay $100 every two weeks for a year, the interest you are paying will go from 546% per annum this year to 486% next year and then it will be a great deal at only 390% in 2018!

That’s Good But It’s Not A Real Solution

I think the province asked the wrong question. Instead of asking “what the maximum cost of borrowing should be” they should have asked “what can we do to fix the payday loan industry?”

That’s the question I answered in my letter to the Ministry on May 19, 2016. You can read it here: Hoyes Michalos comment submission re changes to Payday Loan Act

I told the government that the high cost of borrowing is a symptom of the problem, not the problem itself. You might say if loans cost too much, don’t get a loan! Problem solved! Of course it’s not that simple, because, based on our data, people who get a payday loan get it as a last resort. The bank won’t lend them money at a good interest rate, so they resort to high interest payday lenders.

We commissioned (at our cost) a Harris Poll survey about payday loan usage in Ontario, and we discovered that, for Ontario residents, 83% of payday loan users had other outstanding loans at the time of their last payday loan, and 72% of payday loan users explored a loan from another source at the time they took out a payday/short term loan.

The majority of Ontario residents don’t want to get a payday loan: they get one because they have no other choice. They have other debt, which can lead to a less-than-perfect credit score, so the banks won’t lend to them, so they go to a high interest payday lender.

Sadly, lowering the maximum a payday lender can charge will not solve the underlying problem, which is too much other debt.

Fixing the Payday Loan Industry Properly

So what’s the solution?

As an individual consumer, if you are considering a payday loan because of all of your other debt, you should deal with your other debt. If you can’t repay it on your own a consumer proposal or bankruptcy may be a necessary option.

Instead of taking the easy way out and simply putting a Band-Aid on the problem, what could the government have done to really make a difference? We made three recommendations:

The government should require payday lenders to advertise their loan costs as annual interest rates (like 546%), instead of the less scary and less easy to understand “$21 on a hundred”. Faced with a 546% interest rate some potential borrowers may be encouraged to look for other options before falling into the payday loan trap.
I think payday lenders should be required to report all loans to the credit reporting agencies, just as banks do with loans and credit cards. This may make it more obvious that a borrower is getting multiple loans (of our clients that have payday loans, they have over three of them). Even better, if a borrower actually pays off their payday loan on time their credit score may improve, and that may allow them to then borrow at a regular bank, and better interest rates.
“Low introductory rates” should be prohibited, to lessen the temptation for borrowers to get that first loan.

Opening Up To Worse Alternatives

Unfortunately, the government did not take any of these recommendations, so we are left with lower borrowing costs, which sounds good for the borrower, but is it? This will reduce the profits of the traditional payday lenders, and it may force some of them out of business. That’s good, right?

Perhaps, but here’s my prediction: To cut costs, we will see an increasing number of “on-line” and virtual lenders, so instead of going to The Money Store to get your loan you will do it all on-line. Without the costs of storefronts and fewer employees, payday lenders can maintain their profit margins.

On the internet, rules are difficult to enforce. If a lender sets up an online payday lending website based in a foreign country, and electronically deposits the money into your Paypal account, how can the Ontario government regulate it? They can’t, so borrowers may end up with fewer regulated options, and that may, paradoxically, lead to even higher costs.

Getting a loan online is also much easier. Now that it’s ‘cheaper’ I predict we will see an increase, not a decrease, in the use of payday loans and that’s not good, even at $15 per $100.

The government of Ontario had an opportunity to make real changes, and they didn’t.

Borrower beware.

You are on your own. The government will not protect you.

Should You Get A Wedding Loan?

Posted in Loans and Borrowing

By J. Douglas Hoyes, CA, LIT

Reading time: 3 minutes

You’ve been planning your wedding down to the last small detail including the big question – how are we going to pay for this? Should you take out a wedding loan or use your credit card to cover some of the costs of your wedding or honeymoon?

Let’s consider the concept of good debt and bad debt. Money borrowed as an investment in your future is generally considered good debt. While clearly your wedding is the beginning of your future together, a wedding loan fails to meet one important criteria: this investment is not going to provide you with future monetary value. It’s important to think of your wedding as a consumable as once it’s over you will have great memories but no future financial benefit. Borrowing money to pay for a wedding is no different than paying for a vacation on credit. In other words, I’d say it’s bad debt.

Wedding loan vs credit card debt?

But what about replacing money you might consider putting on your credit card with a lower cost personal loan or ‘wedding loan’? That’s a smart financial decision, right?

Again, I’d say no. Unless you have stellar credit, a bank or personal loan to cover your wedding costs is likely going to come with an interest rate of 12% to 14%. Yes, that’s better than the 20% or more charged on a credit card, but it’s still a hefty amount to pay and will only add to your total wedding costs.

A wedding loan will still come with a high interest rate

Let’s assume you decide to overspend on your wedding (in other words spend more money that you have) and you borrow $8,000 to cover the difference. You take out a 3 year term loan rather than carrying that much debt on your credit cards. You and your new spouse will now be making payments of $275 a month for the next three years to pay off that wedding loan adding a total of almost $1,850 in interest.

Piling wedding debt on top of pre-marital debts

4 in 10 marriages begin in debt

Here’s the other problem. If you are like most Canadian couples you probably already have debt. You or your new spouse, or both of you, may already be working to pay off student loans, a car loan or existing credit card debt. In fact, a study we conducted a couple of years ago revealed that four in 10 marriages begin in debt, and not just from their wedding. Do you really want to add to that burden? Are you willing to postpone your dream of buying a home and starting a family because you started out with so much debt to begin with?

1 in 5 bankruptcies are due to marital breakup

Starting a marriage with debt can jeopardize your future together. Almost one in five insolvencies in Canada list marital breakdown as the primary cause. For many, financial problems started long before the relationship troubles. It’s hard to say which caused the other.

Keep your wedding affordable

My best recommendation is to plan the wedding you can afford. Set a budget upfront and stick with it. Keep track of all your possible expenses as your planning your wedding, and look forward to a long and happy life together, free from unwanted debt.

To help you keep track of your wedding costs, download our free wedding budget planner. It’s an excel spreadsheet complete with sections for all the possible expenses than might arise and room to add in anything special.

When Is Overdraft Protection A Bad Idea?

Posted in Dealing with Debt

By J. Douglas Hoyes, CA, LIT

Reading time: 4 minutes

Keyboard button that says overdraft on it

Overdraft protection seems like a good idea. You pay a service fee to cover you for the unfortunate time or two, that your bank account is temporarily short of funds, avoiding costly returned or NSF cheque charges and the embarrassment of having your payment bounce. According to one big Canadian bank, “it helps you manage your finances by allowing you to complete a transaction.” But does it do that – manage your finances?

Overdraft protection plans & fees

Most banks offer two types of overdraft plans: pay-as-you-go or a monthly fee.

Under the pay-as-you-go model, you pay a daily fee for each day you are in overdraft (usually $5) plus interest on the amount of the overdraft (usually at a rate of around 21% per annum). If you think you are going to habitually need overdraft protection, you could opt for a monthly plan (usually $4 a month) plus interest on the overdraft balance (again usually at around 21% per annum).

This all sounds good. Even under the pay-as-you-go model you are trading a $5 charge (plus interest) for a guaranteed $48 NSF cheque charge.

Beware other triggers

Here’s where things get a bit sticky. The daily charge on the pay per use model is charged based on your end of day balance. If other charges drive your balance further into the negative, you will be charged $5 again. This includes items like month-end service charges and interest. So if you leave your overdraft balance for more than a month, expect another $5 charge in addition to the ongoing interest costs. If you have another cheque or automatic payment go through before payday, expect another $5 charge.

Better than payday loans but more than a credit card advance

Payday loans are notorious for charging exorbitant interest costs. As of 2018, in Ontario most payday loans cost $15 per $100 borrowed. If you borrow $300 from a payday loan lender your cost over two weeks is $60. Use a bank overdraft of that amount, once, for 2 weeks and your cost is thankfully much lower: ($300 + $5) x 21% / 365 * 21 days = $3.71 interest + $5 fee = $8.71, making the overdraft better than a payday loan.

However, what happens if all you do is go over by $10? You still have to pay the $5 which is 50% of your borrowings for one day!

Given that most credit cards charge 21% on cash advances, without an additional $5 fee, taking the $300 payment from your credit card may be a slightly better option, as long as you put funds against your credit card balance as soon as you can.

Avoid the need for overdraft protection

If what you are looking for is better ways to manage your finances, find solutions that will help you avoid the need for overdraft protection to begin with. Here are some tips to reduce your reliance on bank overdrafts:

Keep a minimum balance in your chequing account if you can. Keeping a minimum of two months’ worth of bill payments in your chequing account can provide all the cushion you need in the event of a missed paycheque or added expense. It may be possible to build a small slush fund even if you have debt obligations.
Keep track of all cheques and automatic payments and transfer money from your savings account to cover any payments as needed. With on-line banking and phone apps, it’s relatively easy to check your balance daily. If you know how much you have in your account, and what cheques you’ve written, you should not have any accidental overdrafts.
If cash flow is the problem, consider using a line of credit (the interest rates are usually much lower) and work towards balancing your budget.
If you are carrying an overdraft balance today, it’s time to deal with it. Consider opening a new chequing account at a different bank, then paying off your old overdraft account like any other outstanding debt. We recommend opening an account at a new bank if you think you may have other debt problems to avoid having the bank transferring funds through any right of offset.
Reduce your overdraft limit. If you don’t have access to this extra ‘resource’ you won’t use it.

Overdraft protection is not for your convenience. It’s a way for the banks to loan you more money.

Overdrafts are debts that can be eliminated in a bankruptcy or consumer proposal along with credit card debt, payday loans and other unsecured debts. If you are constantly going into overdraft because you have too much debt, contact us today for a free consultation.

When A Debt Management Plan Doesn’t Work

Posted in Bankruptcy Alternatives

By Joel Sandwith, LIT

Reading time: 4 minutes

Dart missing target to show when debt management plan misses

In recent years we’ve seen an increase in the number of people contacting us for help after a failed debt management plan. A DMP requires that you repay 100% of your debt. If you can’t afford to do this, then a debt management plan is not the right solution for you. Here is one case study to explain what happens when a debt management plan doesn’t work.

Eric’s Story

Eric (not his real name) honestly wanted to repay his debts. He went to see a credit counsellor and arranged a debt management plan to deal with roughly $30,000 in credit card debt and a line of credit. Through negotiation with his banks, the credit counsellor was able to solidify a five year repayment plan which would see Eric pay $575 a month or a total repayment over 60 months of $34,500 including fees to the credit counselling agency. Eric thought this was a good deal because he received a break on interest costs and hoped to be debt free in 5 years.

At first it was a success – it took a couple of months to get his creditors on board, but they did accept the deal. For a year Eric was able to keep up with his payments.

However 5 years of living on a very tight budget is hard to maintain and after the first year Eric started to feel the lack of flexibility of this type of budget. Living expenses inevitably rose and neither his raise nor overtime pay was enough to compensate for the extra outflow. He had a few emergency expenses that were not accounted for in his budget. He tried to cut back on even more spending, but despite his best efforts, his $575 debt management plan payment was just too high.

If you start to fall behind in a debt management plan, your credit counsellor will try and help you keep it going, but the creditors, the banks, won’t wait forever. Since a debt management plan is voluntarily, once payments stop, all deals are off.

A Better Solution

After struggling for a year, Eric contacted us. Eric and I met, reviewed his assets, his income and family size, and who he owed the money to. Based on my experience, I felt his creditors would likely accept a consumer proposal at payments of about $250 per month for 60 months – less than half of what he was paying into his debt management plan, and much easier on his budget. This amount would include all fees, and once he successfully pays the proposal, the balance of the unsecured debt will be waived.

What surprised Eric was three facts he hadn’t considered when he signed up for his debt management plan:

In most cases, a consumer proposal is cheaper than a debt management plan. His payments in a consumer proposal would be half of what they were in his debt management plan for the extinguishment of the exact same debts;
He was still able to keep his home and protect the equity he had accumulated; and
The impact on his credit report of both a debt management plan and consumer proposal would be similar since both would remain on his credit report for a period of time after he completed his payments – 2 to 3 years in the case of a debt management plan depending on the credit bureau and 3 years for a consumer proposal.

In fact, Eric was now a little disappointed he hadn’t gone the consumer proposal route first since he had been making higher debt management plan payments for a year and he felt he had wasted an extra year now in which he credit report would state that he was in a repayment plan that didn’t work.

If you are considering making a deal with your creditors, you owe it to yourself to compare the cost of a debt management plan with a consumer proposal. Try our debt options calculator to see what your payments might look like then contact us for a free consultation. We’ll crunch some numbers based on your particular income, assets and debts and let you know how much you might have to repay under each solution.

Student Debt: Facts, Lessons & Solutions

Posted in Dealing with Debt

By Hoyes Michalos

Reading time: 3 minutes

Text on chalkboard saying student debt, facts, lessons, and solutions

The cost of post-secondary education has been steadily increasing in Canada, leaving many graduates with student debt that is becoming much more difficult to pay back. Today’s students face ever growing tuition fees, additional compulsory fees, and residence fees. In fact, the national average undergraduate tuition fee in 2018/2019 was $6,838 with Ontario tipping the scales at $8,838. And this doesn’t factor in the cost of residence and a meal plan per year.

As a result of these costs, it shouldn’t be a surprise that students requiring a Canada Student Loan now graduate with more than $28,000 in student debt. And while recent changes to OSAP may make it easier for those in need to access more credit, it may also cause some to take on even more student debt.

We’ve seen the impact student debt can have, firsthand in our firm. Based on our study of student debt, we found that the average student debtor was 36 years old, one in four was a single (lone) parent and 60% are female. The inability to find a job paying enough to allow them to repay their loans and the financial hardship caused by these loans led them to file for insolvency to deal with their student debt.

What can you do if you’re struggling with student debt?

If you are having trouble repaying your student loans, there are solutions that you can look at.

You can try negotiating new payment terms to repay your loans, asking to pay a more affordable monthly amount. Be aware however that this will keep you in debt longer as it extends the length of your loan, making you pay more in interest.

Alternatively, you could see if you qualify for government repayment assistance programs. You may qualify for a reduced monthly payment or partial interest relief however there are conditions and you will still be required to repay your loans.

If your student debt seems to be insurmountable and you have been struggling to pay it off for years, consider meeting with a licensed insolvency trustee.

A Licensed Insolvency Trustee can help you review two student debt relief options available in Canada:

A consumer proposal which allows you to make an offer to repay a portion of your student debt, along with other debts, based on what you can afford.
You can consider filing bankruptcy to eliminate student loan debt.

To see if you qualify for either of these solutions, you will need to talk with a Licensed Insolvency Trustee. They will want to know how long you have been out of school, since student debt is only automatically discharged by the Bankruptcy & Insolvency Act if you have been out of school for at least seven years.

They will also want to talk about other debts you owe. Most people we help who carry student debt also have significant credit card debt and often payday loans. Even if your student debt does not meet the 7-year rule for automatic discharge, it may be helpful to consider filing insolvency to eliminate your other debts making your student loans more manageable especially if those debts charge a very high interest and you are only making minimum payments towards those debts.

Student debt relief is possible, but it is a little more complex than dealing with basic credit card debt. For more information read our student debt help FAQ page.