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All Kathleen Zane wanted to do was buy a couch. Instead, she says she ended up with $5,850 in debt and a personal loan with an annual interest of per cent.
Debt from high-interest installment loans, a fairly new product which has gained popularity in recent years, is becoming increasingly common among Canadians with low credit scores or short credit histories. And critics say the loans can be as treacherous for consumers as payday loans.
Forget payday loans, this is Canada’s new generation of high-interest loans
Borrowers can only take out a maximum of $1,500 through a payday loan, notes Donna Borden, a national leader at anti-poverty group ACORN leader and acting chair of the organization’s the East York Chapter in Toronto.
ACORN says it has seen a 300 per cent increase in the share of borrowers taking out high-interest installment loans between 2016 and 2021.
Payday lenders are exempt from federal rules capping the maximum annualized interest at 60 per cent and can charge interest rates of up to 500 or 600 per cent. But they are also small, short-term loans – and often tightly regulated. Canadians cannot borrow more than $1,500 through a single payday loan and usually must pay the loan from their next paycheque, according to the Financial Consumer Agency of Canada (FCAC).
High-interest installment loans, on the other hand, are subject to the 60 per cent limit on interest. But they also allow Canadians to borrow up to tens of thousands of dollars for terms of up to several years, sometimes resulting in consumers paying more in interest than they received through the loan payout.
The public profile of the lenders that offer high-interest personal loans is also often quite different from that of payday lenders. Zane’s loan, for example, is from Easyfinancial, a division of Goeasy, a Mississauga, Ont.-based alternative lender that counts more than 400 retail locations across Canada.
Goeasy, boasts an A+ rating from the Better Business Bureau, awards for best corporate culture and place to work, and says it has raised more than $3.8 million to support the Boys and Girls Clubs of Canada and Habitat for Humanity. An Easyfinancial airy storefront on Toronto’s trendy Queen Street East features high ceilings, exposed brick interiors and a “Proudly Canadian” sign on the window.
In an email to Global News, Goeasy said its Easyfinancial loans help credit-challenged Canadians rebuild their credit profile until they can borrow at lower rates from banks and traditional lenders.
“With over 8.4 million Canadians with non-prime credit scores, our customers are hardworking everyday Canadians that have typically been turned down by banks and traditional lenders,” the company wrote. “Often met by life’s circumstances that have negatively impacted their credit, they turn to easyfinancial for financial relief and a second chance.”
Some payday lenders are also offering personal installment loans. On its website, for example, Money Mart mentions installment loans before its “cash-advance” loans, which work like a traditional payday loan.
Traditional lenders, such as big banks, also offer installment loans but at much lower https://www.paydayloanstennessee.com/cities/dickson/ interest rates. However, people with low credit scores are often turned away.
Global News has interviewed borrowers who took out high-interest personal loans and reviewed their loan agreements. The documents all contain plain language that clearly lays out the terms of the loan. They also allow borrowers to repay part or all of the loan at any point as a lump sum without penalties.
But two of three borrowers told Global News they did not understand that the loans came with such high-interest rates. And two out of three borrowers said their lender proactively contacted them about taking on more debt just months after signing their first loan agreement. A third borrower said he filed a consumer proposal because he couldn’t keep up with his loan.
‘I had no idea’
In Grimsby, Ont., Zane, a now-retired call-centre employee, says when she signed up for financing for a $1,466 couch from Surplus Furniture and Mattress Warehouse in , she says she didn’t understand she’d taken out a high-interest personal loan with Easyfinancial.
Her loan agreement shows she borrowed the amount for couch, an additional $ and a fee of $102 for a total of just under $1,965. The loan had an annual interest rate of per cent. The annual percentage rate (APR), which indicates the total cost of borrowing including interest and other charges, was just over 39 per cent.
Easyfinancial offers unsecured and secured personal loans, auto loans and financing for the purchase of goods and services through over 4,000 retail and merchants such as Surplus Furniture and Mattress Warehouse, the company told Global News via email.
The installment loans provided by Easyfinancial for purchase-financing are for household goods such as furniture and appliances that is available through Easyhome, another division of Goeasy, the company said.
Zane says she doesn’t remember receiving communications from Easyfinancial until a few months after she bought her couch. Her first payment was due at the beginning of February.
In mid-March, though, just as Ontario went into lockdown due to the spread of COVID-19, Zane said she received a call from an Easyfinancial representative saying she’d been pre-approved to borrow up to around $5,000 and inquiring about whether she needed to borrow more.
At the time Zane says she, like several others of her co-workers, had just taken a leave of absence out of concern about contagion in the Barrie, Ont.-based call centre where she worked.
“I’m sitting there thinking, ‘I’m not going to get paid by anybody at my company … the government’s not going to pay me. So I better take out this loan because I have to pay the rent,’” Zane recalls.
At the time the federal government had not yet announced the Canada Emergency Response Benefit (CERB), the first of Ottawa’s COVID-19 income support benefits for individuals.
Zane’s second loan agreement with Easyfinancial shows she borrowed $5,850 with a loan term of 36 months and an APR of around 30 per cent. At the time, she was also dealing with her critically ill mother, who would pass away a few days later, she says. She says she did not realize what the conditions of the loan were until several months later, when she says she asked the company to provide details on the balance of her loan.