There is a new type of short term loan with no credit check that is billed as an alternative to payday loans (one such company advertises, “Say No To Payday Loans” and another, “Better than Payday Loan.”) Typically these loans are 90 days and charge around 28-32 percent annual interest. On the surface this does indeed seem like a good deal in comparison to payday loans which have an APR often exceeding 500% per year.
Too good to be true
Sadly though, it is not nearly as good of a deal as it seems. What you generally don’t find out until you sign the contract is that there is a very high brokerage fee.
One of these short term no credit check loans companies here in Canada charges a $232 brokerage fee for a $500 loan.
When you factor in the interest rate of 32% the total amount that has to be paid back to the company is $750.80. This works out to just over a 50% interest rate for a 90-day loan. Not looking like that great of an alternative to payday loans anymore, is it?
There’s actually two different companies that you are dealing with when getting these type of loans, a broker and the lender. The brokerage company is the one that is charging you the brokerage fee for the loan and the lender is lending the actual money.
With this one particular company the brokerage company and lender are actually under the umbrella of the same company, just with different names and locations. Pretty sneaky, eh?
What this and other companies similar to them are doing is in effect bypassing payday loan legislation, which is getting stricter as provinces here in Canada rightly so tighten up on payday loan legislation or outright ban them.
There is no legislation though mandating the maximum amount a company can charge as a brokerage fee for a loan. So these companies can essentially charge whatever they want as a brokerage fee for a loan, as long as the interest for the actual loan doesn’t exceed 60% APR(the maximum legal interest rate for a loan in Canada).
In this way these financial companies are also able to lend to people in provinces where payday loans are banned as they’re not technically a payday loan, such as New Brunswick, Labrador and Newfoundland.
Google Adwords recently banned payday loan companies from advertising with them (an outright ban on companies offering 60 day or less loans and in the USA a ban on companies advertising loans with an APR of 36% and higher).
These companies offering short term no credit check loans unfortunately have found a loophole to that as well as they are not technically a payday loan so can advertise all they want using Google Adwords.
The downhill spiral into debt
The problem with these extremely expensive loans is that the interest rate is so astronomically high (when you factor in the brokerage fee and actual interest rate) that it just puts a person into even greater debt and makes it very difficult to get ahead financially.
What all too often happens is a person ends up getting yet another of these high interest short term loans just to make the payments of the initial loan. This is where things can go downhill very quickly as the consumer can end up with multiple of these type of loans paying several hundred dollars a month in interest that they can hardly afford. This results in a very rapid downhill spiral into debt, hopelessness and despair.
When the consumer does not have enough money in their bank account to make a minimum payment this is where things very quickly go from bad to worst. These companies often will make multiple attempts with different amounts debited to take money out of your bank account.
This can result in hundreds of dollars in NSF charges on top of steep NSF charges from the lender as well. Simply having the bank put a stop payment on the company often doesn’t prevent NSF charges as the company will simply attempt to take the money out of your bank account with a different amount.
The stop payment will only work for amount that the company is scheduled to take out of your bank account. If the creditor changes the amount debited by even one penny the stop payment will not be in effect, potentially resulting in even more NSF fees from the bank and financial company.
For this reason if you are declaring bankruptcy, going into a consumer proposal, credit counseling or the like it is essential that you close your current bank account and open a new one.
Harassment from credit collectors
These companies tend to be very aggressive in their credit collection as well, using tactics such as calling you at work, calling your employer, calling family and friends, calling you at home every hour on the hour, multiple emails, being rude and threatening, etc. As you can well imagine, this can create a tremendous amount of unnecessary stress for the consumer.
There is light at the end of the tunnel
If you find yourself in this situation I highly recommend that you seek assistance from a credit counselor to discuss your options.
Here in Canada you can make an absolutely free no obligations appointment with a financial adviser with the Credit Counseling Society (www.nomoredebts.org).
There is a ton of useful information on their website as well at www.nomoredebts.org and www.mymoneycoach.ca. There are options available other than bankruptcy and a consumer proposal such as a debt repayment program.
A debt repayment program is where on your behalf they negotiate a monthly payment to your creditors, often at 0 percent interest. You than pay one monthly payment to the Credit Counseling Society until the debt is paid off, typically over four years or less.
During this period of time you won’t be able to get any new credit and will have to cut up your credit cards. However, once the debt is paid off it will have no effect on your credit rating.
Getting a secured credit card to rebuild your credit
One option, however, to build your credit before completing the debt repayment program is a secured credit card.
This is where you put a deposit on the credit card (say $500) and the credit card companies gives you a credit limit of whatever your deposit is.
They report regularly to the credit bureau so in this way by making your monthly payments you can rebuild your credit rating.
One company that I recommend that offers a secured credit card is Capital One Financial, where you can get a secured credit card, the Guaranteed Secured MasterCard, with as little of a $300 deposit. The annual interest rate is 19.8% with an annual fee of $59. Many banks offer secured credit cards as well.
It really is a shame how these financial companies, such as the ones offering these extremely costly short term loans prey on those who can afford it least.