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Types of Canadian Loans You Must Avoid
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In life, at one point or the other, everyone needs extra cash to cope with the financial hurdle. However, know that not all types of loans are created equal. Especially the loans that are given at very high interest rates have started to become a constant financial worry than a relief.
With the availability of high access and easy cash, these loans are often presented as a solution to all the financial woes. But more often than not, this is a trap, and once set, it keeps doubling. Ultimately, it reaches a point where the borrower has no option but to be declared a defaulter.
Now you might be wondering how this happens when in Canada, it is a criminal offense to charge more than 60% interest per year. If so, know that there are plenty of loopholes in this. One of the major is being allowed to charge over 390% APR on a two-week loan in Ontario and British Columbia.
Although the majority of Canadians like to go for secured low-interest loans, there is a portion of people who picks high-interest loans. That is because you do not need any security or credit score to get approval and access to cash. Whatever the reason, make sure you are vigilant enough to know which loan you can get over and which loan will get you trapped.
To show you a few of the Canadian loans you must avoid, we have prepared a list. You will even know the best much cheaper alternatives to these high-cost loans as well.
Payday loans are the type of loans offered at the absolute highest allowable interest rate. The strange thing about this is that these interest rates are legally permitted by each province. All the payday loan borrowers have bank accounts and they all have jobs. But due to the convenience of payday loans or sheer ignorance, they fall into it.
To get a fair idea of how much higher interest you exactly pay in payday loans, let’s make a comparison with credit card cash.
Read More: Personal Loans in Canada: Complete Guide
If you take a payday loan of $300 for 2 weeks, you will have to pay an extra $63 in interest. Whereas, the same amount borrowed in credit card cash advance for the same term, will cost you an extra $3 in interest and $5 in fees. That is, 8x less than the payday loan.
Add to this the fact that, even you may have paid all your loan on time, some lenders will reject your future loans just because you took a payday loan in the past. So, having a payday loan in your credit history can turn against you. Solution? Avoid it at all costs.
High Interest LOCs
You might have heard about a line of credit – mainly secured line of credit and unsecured line of credit – as a convenient borrowing method. Indeed, it allows you to pay borrow, and repay funds, up to a predetermined limit. Although there are bank and credit unions that offer a line of credit loans at an affordable interest, there is a vast majority of a lender who charges high interest. Their interest rate can go as high as 45% or even more.
A high-interest line of credit should always be your last resort. If you are feeling overwhelmed or in need of immediate cash, consider consolidating it onto one of the many balance transfer credit cards out there. Or you can also call your credit card company and see if they can reduce your interest rate or adjust your repayment terms.
If you cannot take loans from payday loans and a high-interest line of credit, then where should you go? What is the best alternative for these high-interest lenders? What to do if you need immediate cash? Once you know the Canadian loans you must avoid, here are the alternatives to these high-interest loans.
Need Immediate Cash? Here is What to Do
If you need access to cash quickly, consider taking a credit card cash advance with low-interest rates. There are plenty of credit cards that offer low-interest cash advances with rates between 10% to 13% – way less than LOCs and Payday loans.
You can also consider invoking the little-known combination of first taking out a cash advance and then transferring that cash onto another credit card via a low-interest balance transfer offer. It is the overall cheapest means of borrowing in Canada today.
Low Interest Loans
Reputable same-day lenders charge less than payday lenders, particularly to borrowers with good credit scores. If you afford to wait a little longer to receive funds, it is probably worthwhile to take out a regular, low-interest personal loan rather than a same-day loan. Here are some of the best loan lenders we recommend.
- LoanConnect: Loan Connect lenders’ rates begin at 4.8% APR. To qualify for it, you should be a Canadian citizen.
- Fairstone: Fairstone offers loans ranging from $500-$35,000. If you can secure the loan with an asset like your house or a car, you are eligible for it. The interest rate is lower than payday loans and ranges from 19% to 40%.
Best Alternatives For Short Loans
You read the Canadian Loans You Must Avoid, and understood what you must leave. Now, you might be wondering whether there is an alternative to these loans which you should take or not? So, here are your two top alternatives.
Chequing Account Overdraft
Don’t have a credit card? No worries! Go into overdraft with your chequing account. Multiple chequing accounts offer overdraft protection for around $5 or so per month, with maximum overdraft amounts usually between $2,500 to $5,000 or so. Although this is a variable solution when you are in a pinch, know that the interest rates which a chequing account charges are higher than the credit card rates.
Savings and Investment
We are often reluctant to withdraw funds from our savings account or look into our emergency funds. However, know that your loss will be less money if you use it instead of taking a loan. A short loan with a higher interest rate will accumulate more faster than you might know, reaching a point where you won’t be able to return it.
You May Also Like: Private Mortgage Loans For Short Term
The Bottom Line
Payday loans and high-interest lines of credit are Canadian loans you must avoid at all costs. If you don’t, you will end up being trapped in it. Instead of these high-interest loans, consider the best alternatives provided in the article.
In the end, at Lionsgate, we specialize in helping people obtain funding private mortgages for land purchases as well as for other real estate transactions. If you are looking to buy land in Canada, get short loans, or finance your purchase, just leave us a message and we will try to connect you with the best local realtors and sources for financing.