In Ontario, you’re protected by the Ontario Collection and Debt Settlement Services Act (the “Act”). The Act sets out strict laws on what a debt collection agency can - and cannot - do. Among other things, it attempts to curb collection agencies from using harassing or intimidating tactics to get you to repay the debt you owe. Here's what this law covers.
If you’re struggling to pay your bills and put food on the table, a high interest loan might seem like your only option. Or if you’re finding it difficult to budget due to an unpredictable or sporadic paycheck, you might feel the need to use a payday loan to bridge the gap.
Whatever your reason is for taking on a high interest or bad credit loan, you’re not alone. Many Canadians have turned to bad credit loans or payday loans as a way to make ends meet.
If you have a bad credit loan or are considering one, it may be time to speak with a Licensed Insolvency Trustee (LIT). A LIT can discuss the debt management options available and can help you to try and avoid taking on a high interest loan.
What is a bad credit loan?
A bad credit loan is essentially a personal loan for people with bad credit. In Canada, credit scores range between 300 and 850. A credit score below 560 is generally considered to be a “bad” credit score.
Your credit history is one of the factors that is used by lenders to determine if they will give you a loan. If you have bad credit, it can be difficult to find a creditor willing to loan you money. This is why bad credit loans exist.
Why you should avoid a bad credit loan
People usually take on a bad credit personal loan as a last resort. They have no credit or bad credit, or they simply need fast access to money. Bad credit loans are typically easy to obtain with a quick approval process and some, such as a payday loan, don’t require a hard credit check. This means that consumers with a history of Consumer Proposals or Bankruptcy can still qualify to take on this type of loan.
Unfortunately, the easiest loans for people with bad credit to obtain are payday loans. Payday loans can be extremely dangerous for a number of reasons, including:
- High interest rates. According to the Criminal Code of Canada (section 347), personal loans are prohibited by law to exceed 60%. However, payday loans are not included in this law allowing the cost of a payday loan to be equivalent to an interest rate as high as 500 to 600%.
- High late fees. If you miss a payment, you can quickly begin to rack up high-cost late fees. The amount you owe will continue to increase.
- Predatory lending. A loan is considered to be predatory when the fees and interest rates are so high that it is almost impossible to pay back. A loan can also be considered predatory if deceptive sales tactics are used to convince someone to take on a loan that they can’t afford.
- Perpetuate an endless cycle of debt. Due to the extremely high interest rates and late fees, it can be very difficult to get out of the high interest loan cycle.
- Wage garnishment. If you fail to make your payments, the payday lender can go to the courts to initiate wage garnishment.
Alternatives to bad credit loans
Before taking on a payday loan, consider all of your options. If you don’t know your options or you’re unsure which choice is best for your circumstance, speak to a LIT. Some alternatives to bad credit loans include:
- Borrow from family and friends. Borrowing a small loan from a family member or friend can be a much cheaper option than taking on a high interest payday loan.
- Cash advance on a credit card. When you take out a cash advance using your credit card, you will be charged interest immediately and the rate you pay will be much lower than a payday loan.
- Get an installment loan. An installment loan is a personal loan that is repaid on a regular schedule. Your credit score as well as your ability to repay your loan will be used to determine whether or not you can get an installment loan as well as how high your interest rate will be.
- Look for more work. Ask your employer if you can take on additional hours or look for a side hustle that will help you to bring in additional money. This might not help if you need money immediately but it can help to prevent similar situations in the future.
How to get out of a bad credit loans
If you have a high interest payday loan, or several, it is easy to fall into a debt cycle. With the excessive interest rates and late fees, it can be extremely challenging to pay off your loan and have enough money left over to pay your bills. This is a common cycle that people fall into with bad credit loans. You take out one loan to cover your bills and then because of the high interest and fees, you have to take out another loan just to pay it back.
If you find yourself in a position where you are drowning in debt and unable to make your payments, speak with a LIT as soon as possible. A LIT can talk you through your options and help you to determine the best path forward. Some of your options for eliminating high interest loan debt include:
- Credit Counselling. A LIT can provide credit counselling services to help you learn to manage your personal finances. This can include budgeting education, credit education, debt management assistance, and financial planning assistance. While credit counselling won’t wipe away your high interest payday loans, it can help you build the financial skills needed so you won’t have to turn to a bad credit loan in the future.
- Consumer Proposal. A Consumer Proposal is a legal process administered by a LIT. An offer is made to your creditors to settle your debts, including any payday loans, for less than you owe. To file a Consumer Proposal, your debts must be less than $250,000 (excluding your mortgage).
- Bankruptcy. Bankruptcy is another legal process that can only be administered in Canada by a LIT. If you are carrying a ton of debt, including high interest, and considering Bankruptcy, most of your unsecured loans (including payday loans) can be eliminated.
Take control of your high interest loans
If you are struggling to pay your bills and feeling the stress of never-ending debt, it’s time to reach out to a LIT. A Licensed Insolvency Trustee can provide you with high interest loan help and can explain the various debt management options that are available to you. You don’t have to deal with your debt alone. Reach out to us to schedule a free consultation today at Adamson and Associates or 519-310-JOHN (5646).