Tag Archives: interest rate

The Latest Short-Term Loan “Deals”

OK, there should really be a sarcasm font on this. When I say “best deals” it’s actually the so-called best of horrible ways to borrow.

However, millions of Canadians look for short-term money every month. And they’re not just people who are down and out.

I filed my income tax return last Monday. I’ll have the refund cheque in my hands by early next week. That’s incredibly fast, yet millions of people can’t wait even a week (with direct deposit)? H&R tax refund advance rates are 15% on the first $300 and 5% on the rest. So on a $2,000 refund, they’re taking $130 to save you a week of waiting. That’s nuts and translates to an annualized interest rate of 338%.

They’re everywhere, but an Edmonton pawn shop is advertising a special on the radio: Only 25% if you redeem the item you pawned within two weeks. That’s supposed to be a deal? It’ll cost you $125 to get $500 for two weeks. That’s an annualized interest rate of 650%.

There’s a new website advertising nationally called lenddirect. The ads show a lot of smiling people that they can now get a convenient loan with just a few clicks online. The tiny tiny print shows the interest rate of 46.93%. On a $10,000 loan over five years, that’s $16,100 interest.

Not to be outdone, Money Mart has now expanded from the payday lending business model to also offer installment loans up to five years and $15,000. Their ads and website heavily harp on the fact that they have no hidden fees. Well, that’s reassuring. But you need to dig a long way down their website links in order to find the interest rate: It’s 59.9%. On that same $10,000 installment loan, your five year payments would be $528 and borrowing $10,000 costs you $21,700 interest. Yes, borrow $10,000 – pay back almost $32,000!

Borrowing from any of the short-term lenders really does make things worse – much worse, and not better. Sure, today you have a few bucks to relieve some financial stress, but it comes at a staggering price of a ton more debt and stress down the road. There are always alternatives, such as an overdraft, take a cash advance from your credit card, get an advance on your pay or holiday pay, borrow from a family member, or just be late on the bill that you have to pay today.

Spend $45 to Save $36,000

Two weeks ago, I received an email from a listener in Kelowna asking for some financial feedback. The email had enough in it to fill an hour or more, but here are the highlights:

This middle-aged couple has done really well in their investments. They have significant RRSPs and contribute 5% to their pension plan. They do have an RRSP loan at a good rate – and I won’t fuss about that.

They live within their means, no extravagant spending, small mortgage at a great rate, and an income of over $100,000.

On the debt side, it’s a different story. When they bought the Money Tools book at Mosaic, they immediately found $12,000 savings! Pretty good for a $20 investment! I keep saying: You go to almost any page and you’ll find a way to save money in whatever area! In their case, they have a line of credit that’s insured with life and disability. That’s one of THE biggest ripoffs in the financial field. The bank’s profits are 50 to 60%. Never get your insurance from the bank – ever. He immediately called to cancel it, but was on hold for 1 1/2 hours and never did talk to someone. Well, don’t bother calling. Write a three sentence letter that you want it cancelled as of today and deliver it to your branch. Banks can have a way of ignoring a call, claiming they never received it, etc. in order to protect their profit. In writing and delivered gets it done.

Their line of credit has been around since finances weren’t so good in the 1980s. It’s around $40,000 at a rate of over six percent! The rate is always prime plus something. That rate may have been OK when things weren’t so good, today it’s a massive overcharge. His credit score is over 780! He’s in the top 10% most credit worthy people in the country and ought to pay prime! 3% over for the last 10 years and on-track to only pay it off in another decade is over $25,000 in extra interest! All he did was go to equifax and pull up his credit score! When rates go up, lenders move up your rate. When your credit improves, they’re not voluntarily passing on a lower rate! You have to know your score and go ask – or demand it or fire your bank.

In the case of this couple, I wouldn’t move the credit line, but just get from the 10-year plan to one that pays it off pretty easily by Christmas this year. They have $20,000 in savings. Read the step up debt repayment section: First pay off your debts, then start saving. In their case, they should keep $5,000 for emergencies, dump $15,000 onto the credit line and pay $2,000 a month to get it done. It will take another six months to pay off the RRSP loan, and by June next year, they’d be debt free – instead of the 10-year payment plan they are on.

With a great income and getting really mad and motivated, they would be

$25,000 insurance cancellations for the 10 years the line of credit would take to pay off on their current plan

or: $25,000 (roughly) to pay off the line of credit 10 years sooner

$11,000 paying off the RRSP loan (the interest isn’t tax deductible) nine years sooner (by next summer)

That’s $36,000 of savings by spending $20 on the book and $25 on pulling their credit score. That’s a pretty good return!!

Then, next June to December, they can save the $500 they were paying on the RRSP, the $2,000 they were paying on the line of credit for six months or a total of $15,000 by just re-directing what they had been paying on their debts!

What Matters More: Your Rate, Balance, Term or Payment?

Quick question: Would an extra $4 a month really rock your world in a big way? There’s a new radio campaign out from one of the no-service banks: Switch your credit line to us and save half a percent in interest. Plus, the guy in the commercial says he now sleeps much better and worries less.

OK, that’s stupid. If you don’t owe anything on your credit line, the rate doesn’t matter at all. If you owe $10,000, a half percent interest saving amounts to $4 a month. That’s going to help you sleep better and worry less? Even with a $20,000 balance, it’s a lousy eight bucks a month saving! Hello?

The ad may sound great, but shouldn’t get anyone excited. We get ourselves into a big financial mess with two things: Focusing only on the rate or purely the monthly payment.

When it comes to borrowing, there are four things you’ll need to know:

The balance or total amount you’re borrowing
The interest rate
The term of the loan – how long you’ll owe the money
The payment per month

The payment is the least important factor. Sure, it has to fit your budget, but you can pretty much have any payment you want – you just have to stretch the term to a really long and stupid time period. A car can get financed for three years, or up to seven years – your call, your interest, your pain – if you’re not careful and don’t ask!

The rate only matters if you owe a lot of money AND you owe it for a long period of time. You’re better off owing $5,000 at 20% for a year than owing $5,000 at 6% for a decade! The faster you pay it off, the less the interest matters since the debt isn’t going to be around for long!

That leaves the balance, or the total amount you owe or borrow. THAT is the most important factor. News flash: If you don’t borrow anything – the rate doesn’t matter and your payment will be ZERO! Want to guess how many foreclosures, collections, repossession or legal actions happen to people who don’t borrow money? NONE – that’s right!

If you can lower what you owe, borrow less, get a little less expensive renovation or car, take some of your savings as a down payment, or any one of a dozen other ways, THAT controls everything.

Focus on what you are paying and not what you’re saving. Focus on the balance and not the rate! Four bucks a month is not the issue, it’s the payment of $300 or so, the balance you owe, and the fact that your line of credit likely has your entire house for collateral!