After pulling back on borrowing and spending at the beginning of the pandemic, Canadians are increasingly seeking alternative lending and buy-now-pay-later solutions. Here’s what you should pay attention to if you’re going to apply for these.
Wrap your head around all the fees, terms and conditions for alternative loans
Credit-constrained Canadians — those with poor credit scores (lower than 600) and incomes below $ 40,000 — are relying heavily on alternative lending solutions; loans from non-banks and non-traditional lenders like online lenders. If approved, borrowers get the fast cash they need, through a loan or line of credit for example, to make ends meet, which we all know is critical right now.
In exchange, alternative lenders can collect higher interest and other potential fees such as NSF fees (if a payment bounces); missed payment penalty fees (administrative fees if the borrower misses a payment); collection fees (if the lender has to go after the borrower to pay or if they move the deal to a collection agency); and loan closing and origination fees (fees to complete the paperwork and set up automatic payments). All of these fees are technically legal. But, unlike the major banks and payday lenders in Canada, the alternative lending market is less directly regulated, and that can expose consumers to greater risks when borrowing.
According to recent data from LoansCanada.ca, approximately 30 per cent of credit-constrained respondents felt they were pressured into choosing a particular lending product because the offer (rate and repayment terms) would be “unavailable” in short order. Further muddying this, is that under pressure these same borrowers agreed to terms they didn’t fully understand.
Pressure is bad for financial decision-making.
So, before you sign any lending agreement, step back for at least 24 hours to review and understand the terms and conditions, ask questions and release the tension of any high-pressure sales tactics. Absolutely every single fee to complete your lending agreement, and the interest rate, should be incorporated accurately into the contract that you sign. Does the interest rate and repayment schedule appear correctly? Have you been charged anything in addition to what you and the lender discussed? Correct and negotiate any errors. During this 24-hour waiting period, I’d also recommend comparing multiple offers from multiple lenders. Take time to read customer and watchdog reviews, too, because some alternative lenders have much better reputations than others.
If there are language barriers, it can be helpful to go through this review process with someone who can translate the agreements for you and assist with getting answers to your questions.
This is the digital version of old-school layaway plans. According to PayBright, Canadians are increasingly using these programs to break up their payments from various purchases; clothing, home supplies, work-from-home solutions and the many nice-to-haves — such as makeup — too.
For small purchases paid over a matter of a couple of weeks or months, buy-now-pay-later retailers may offer zero-per-cent interest. For larger purchases paid for over six to 60 months, retailers set the interest rate for these, which can sometimes be less than average credit card interest rates. And yes, credit checks are conducted for these bigger purchases.
The benefit to consumers is not having to pay all at once, which keeps more funds available for day-to-day spending or just-in-case savings. For retailers, this keeps sales and inventory moving. The drawback for consumers is additional debt.
What’s key to pay attention to when considering a buy-now-pay-later option is the total cost of the purchase, how large the payments will be, the frequency of payments (weekly, bi-weekly, monthly, etc.), and the interest that will be charged. In other words, look at the full cost of the purchase, and ensure that your monthly budget can handle it.
If you’re in a pinch for money or just trying to ease the pressure on your cash flow, the best advice I can offer is to reduce any unnecessary borrowing risk by being informed of exactly what you’re signing up for, and ensuring you can afford the repayments.