Some Loans Come With a Steep Price Tag

Non-traditional loans may seem like a good option, but they can carry high costs and big risks

There are a lot of very good reasons someone might need to access an emergency loan, however these loans usually come with hidden costs that can lead to a cycle of debt that is hard to escape. These loans may seem like a person’s only option, especially if they have poor credit or cannot access traditional forms of credit. These loans may be advertised as low risk, but they are anything but that and often have strict repayment terms and charge high interest rates.

These products are often targeted towards low-income individuals and families who may be experiencing financial hardship or have an unexpected expense. They can take a variety of different forms such as payday loans, title loans, pawn loans, installment loans, or rent-to-own financing. These credit options can be tempting when you need cash quickly, but they come with hidden costs and risks that can lead to a cycle of debt.

High-cost credit products come in several different forms, but, regardless of form, are expensive and can easily lead to a lifelong cycle of debt. They also do not always help you build your credit history or raise your credit score but can certainly lower it. Payday lenders, for example, do not report on-time payments to the credit bureau, but will report late or missed payments. This means these loans do not offer the opportunity for you to raise your credit score and will not make it easier to access traditional forms of credit.

While the Government of Canada has recently announced some important changes to the way high-cost credit products are regulated —changes that may, eventually, make these products a safer choice — high-cost credit products are still an expensive, risky, and potentially dangerous solution to your financial challenges.

So, how can you avoid the dangers of high-cost credit?

The first step is to explore alternatives to borrowing money. Financial challenges are often solvable without turning to credit, and there are a number of free services that can help. For example:

• The Alberta Utilities Commission offers short term billing assistance for electricity or natural gas utility bills, and lists a number of community organizations who can offer financial assistance.
• Rise Calgary offers Basic Needs Supports.
• The Government of Alberta offers emergency financial assistance through the Emergency Needs Allowance.

There are also many financial services that can help you save money, make a budget, manage credit, and build a sustainable financial plan:

• Momentum offers free financial coaching, matched savings programs, and money management workshops.
• ASPIRE and the EFEC connect the services of many community based financial empowerment organizations.
• Money Mentors is a non-profit credit counseling, debt consolidation, and financial education agency that specializes in helping Albertans pay down debt, navigate bankruptcy, and manage finances.

If none of the free resources available are able to assist with your financial situation, another alternative may be a credit union. Credit unions can sometimes offer personal loans with much better terms than a payday loan or other high-cost credit option.

If there are no alternatives available to you and you absolutely must access a high-cost credit product, try to keep the following in mind:

• Read the terms and conditions in detail and ask questions about anything you do not understand.
• Do your best to make payments on time. Many additional fees and costs arise due to late payments.
• Seek financial coaching through Momentum or one of the many organizations that are members of ASPIRE and EFEC to help you make a financial plan and manage your debts.
• Remember that you have a “cooling-off period” during which you can cancel your loan without penalty.

Finally, if you have already accessed a payday loan, and are having difficulties paying it off, The DUCA Impact Lab’s Escalator Loan allows you to pay off payday loans under favourable rates and terms, build your credit history, and escape the cycle of payday loan debt.

High-cost credit products can seem like a quick solution to short term financial challenges but come with significant (often hidden) costs and risks that can lead to an ongoing cycle of lifelong debt. It is best to avoid these credit options completely, but if you absolutely must access them, proceed with extreme caution!

Momentum provides financial literacy, entrepreneurship, and skills training programs to support people who live with financial barriers. They are a change-making organization that focuses on poverty reduction and bringing social perspectives to economic development. As a leader in the field of economic empowerment, Momentum has created a resource to help navigate credit and use it sustainably. Learn more about Momentum here.