When Aaron Bryan lost his job at the beginning of February, he figured he could draw on his experience renovating homes to make a living as a general contractor. By early March, however, as the coronavirus pandemic was starting to hit Canada, Bryan says all his business dried up overnight.
That’s when he says he went into “crisis mode” and called Fresh Start Finance, which was advertising personal loans of up to $15,000 on social media.
But instead of borrowing $15,000, Bryan ended up with a loan that demands regular payments but provides no cash upfront. The agreement stipulates he would have to pay nearly $4,400 over three years and get just $1,750 back at the end of the loan period.
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Bryan says his experience should serve as a cautionary tale for cash-strapped Canadians tempted to borrow at high-interest rates amid the COVID-19 crisis.
A loan with no cash upfront
The loan Bryan signed up for is a so-called “secured savings loan” or “credit-repair loan,” in which borrowers must make payments but receive no money upfront. Lenders usually release some of the funds either at the end of the payment period or gradually, as deposits come in.
Some alternative lenders say this can help borrowers with a bruised or non-existent credit history improve their rating by building a record of making regular payments. But the loans usually come with high interest rates and steep fees.
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In Bryan’s case, the loan carries an annual interest rate of 17.99 per cent, according to a copy of his loan agreement reviewed by Global News. The annual percentage rate (APR) of the loan, which reflects the total cost of borrowing including fees, is more than 39.6 per cent.
The agreement seen by Global News shows Bryan’s initials beside an acknowledgment that he would not have access to money upfront, would have to pay $122.74 a month for three years and would get back $1,750 only at the end of the loan term.
Bryan, however, says he signed up for the loan because he was told on the phone it would be a step toward getting the $15,000 personal loan.
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But when he called Fresh Start Finance, he says he was told he didn’t qualify for a personal loan because his credit score was too low. Instead, the company transferred him to Spring Financial, which set him up with the savings loan as a way to boost his credit score.
Fresh Start Finance and Spring Financial are part of the Canada Drives Group, which offers a number of consumer finance products, including auto loans, across Canada.
“They were talking as though all I needed to do was sign up for this secured loan so that they could somehow work with the credit company and give me a call back then,” Bryan said. “And then I would be approved for the $15,000.”
But when the first payment of around $122 came out of his account, Bryan said he read his loan agreement more carefully and became very concerned about the fees and the high APR.
“After not hearing from them once they took my first payment out of my account I realized I only increased my monthly expenses without increasing my access to usable capital,” Bryan told Global News.
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Bryan says he called Spring Financial shortly after asking to close his account but was told that would not be possible. The company did, however, agree to remove loan protection and credit monitoring services, lowering the monthly payment to $83.14.
Eventually, Bryan reached out to his parents, who agreed to lend him the funds to pay off the loan.
On a later phone call, Spring Financial said it would close the loan upon receiving “a settlement payment” of $488.70, according to an email message seen by Global News. Bryan said the company told him the amount would cover set-up costs.
Canada Drives, Spring Financial’s parent company, said it does not promise automatic qualification for a $15,000 personal loan.
Non-disclosure agreement
After Global News contacted Canada Drives for comment, Bryan says the company offered to waive the set-up fee and refund the amount of the first payment. However, Bryan says the company also asked him to sign a non-disclosure agreement.
Asked about the agreement, Tyler Thielmann, vice-president of consumer lending at Canada Drives, said it is “a standard release letter.”
“When a customer brings an issue to us and we are able to come to an agreement outside the course of our normal policy we get a standard release letter signed by the customer,” Thielmann told Global News via email. “The release provides protection to the customer as well as the company by outlining each party’s obligations.” He added the company has used similar letter on other occasions.
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According to the secured savings loan contract seen by Global News, borrowers can prepay the loan principal of $1,750, the $550 set-up fee and any applicable interest charges at any time without incurring any penalty or fees.
“If at any time the Indebtedness has been satisfied in its entirety, you may request that we discharge the Agreement and deliver to you all the documents to effect such discharge.”
However, Spring Financial is also willing to close out loans “as a good-will gesture,” if a borrower asks to cancel the loan ahead of the first payment, Thielmann said. Before doing so, however, the company will transfer the borrower to its “retention department” and try to “re-educate the customer” about why they couldn’t get approval for a traditional loan and the benefits of a secured savings loan, Thielmann said.
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According to Bryan’s account, Canada Drives was ready to close the loan at no cost even after the first payment, had he signed the non-disclosure agreement.
Bryan told Global News he decided not to sign the agreement because he believes it’s important to share his experience with other Canadians who may be facing financial hardship amid the health emergency.
At the time of writing, Bryan had not paid the settlement amount of $488.70, and his account with Spring Financial remained open.
If he does pay the amount, Bryan would be entitled to a refund of $467.74, Thielmann said.
He also said Spring Financial is offering to temporarily reduce or defer payments for customers who have seen their income reduced amid COVID-19. The company is also helping borrowers who have optional creditor insurance make a claim. Finally, for those who have made payments on a secured savings loan for 18 months or longer, the company is offering to terminate the loan early, waiving all outstanding fees and refunding 100 per cent of the customer equity, Thielmann said.
A better alternative to payday loans?
Canada Drives presents itself as a better alternative to payday loans for cash-strapped borrowers with low credit ratings.
When a borrower like Bryan doesn’t qualify for an upfront cash loan at Fresh Start Finance, they may be handed over to Spring Financial where they’re offered a secured savings loan that can help them improve their credit, Global News reporting indicates. If they make regular payments, they may then be able to access a traditional loan for a larger amount.
A few weeks ago, on March 9, Canada Drives said it adopted a new policy that guarantees every secured savings loan customer who makes all payments on time for 18 months will be able to get a $2,500 upfront cash loan “at an interest rate of 29.9 per cent or less.”
“The guarantee is the only program in Canada that promises to help Canadians get access to mainstream financing and get out of their cycle of payday loan debt where they are paying in excess of 400 per cent annual interest,” Thielmann said via email.
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Although Bryan’s loan agreement predates the policy, he would be able to receive the $2,500 loan after making timely payments for 18 months, Thielmann said.
Payday lenders in Canada are exempt from federal rules capping the maximum annualized interest at 60 per cent. In Ontario for example, the maximum cost of borrowing $100 through a payday loan is $15 over a two-week period, which works out to an annual interest rate of 390 per cent.
The total cost of a payday loan including fees may be equivalent to an interest rate of 500-600 per cent, according to the Financial Consumer Agency of Canada (FCAC).
But payday loans are meant to be small, short-term loans — and they often are 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 FACAC. (In Alberta, B.C., Manitoba, New Brunswick and Ontario, borrowers have up to 62 days).
Many provinces also require that payday lenders provide a two-day cooling-off period during which borrowers can cancel a loan. Many also prevent payday lenders from extending or rolling over a payday loan.
With high-interest personal loans from alternative lenders, on the other hand, interest rates are in the double — rather than triple — digits, but Canadians are also often able to borrow much larger sums, said Scott Terrio, manager of consumer insolvency for Ontario-based Hoyes, Michalos Licensed Insolvency Trustees.
In a way, he says, expensive personal loans are better than payday loans because they carry a lower interest rate. But in another way, “they’re worse because now you owe $20,000 instead of $1,200 like a payday loan.”
And while payday lenders don’t typically report to the credit bureaus, Canadians who have no credit history or want to rebuild their credit score can do so through a secured credit card, without taking out an expensive secured savings loan, Terrio said.
Savings loans may help a borrower improve their credit rating, if the borrower makes timely payments, but this isn’t guaranteed.
“Spring does not guarantee that a Spring loan will improve your credit score,” reads Bryan’s savings loans contract with Spring Financial.
“Banks and other potential creditors may view a borrower having too many loans as an increased risk,” the document also says.
Alternative lenders often sell high-interest personal loans and saving loans through high-pressure sales tactics, Terrio said.
“They prey on financial illiteracy. And they prey on desperation.”
Borrowers who sign up for the loans often are not given an opportunity to review the contract in private and don’t understand just how expensive the loan is, he added.
Bryan said he signed his loan agreement while over the phone with a Spring Financial representative, adding that he wasn’t given enough time to thoroughly review the contract despite repeatedly asking for more time to read it.
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At Canada Drives, Thielmann said the vast majority of the company’s customers prefer to have someone walk them through the loan agreement over the phone. However, he said, “if a customer would like to disconnect and review the contract on their own time they are more then welcome to do so.”
The company provides plain-language disclosures on the first page of the loan agreement and says it trains all its agents to be able to “accurately and adequately explain the product,” adding that an agent will verbally repeat multiple times to a savings loan applicant over the phone that they will not receive funds upfront. Thielmann also said Spring Financial has an online help centre and a client-care team to help borrowers who have questions after taking the loan. As well, the company sends out welcome emails and payment reminders to clients, he said.
Avoiding high-interest and payday loans in a time of crisis
Across the country, hundreds of thousands of Canadians have seen their incomes drastically curtailed amid the coronavirus pandemic. The latest data from Statistics Canada shows at least one million Canadians lost their job in March and another two million who were still formally employed last month were forced to work significantly fewer than their normal hours.
“We know that a lot of people, when it’s hard to make ends meet, turn to expensive loans,” Jeff Loomis, executive director of Momentum, which provides financial coaching to low-income Canadians in Calgary, told Global News before the release of the March jobs report.
But Canadians should try to avoiding high-interest borrowing “at all costs” in a cash crunch, Loomis said.
Canadians who don’t have an emergency fund to fall back on should make an emergency budget, he said. The goal is to reduce expenses to absolute necessities — and that includes talking to landlords, lenders and utility companies about the possibility to reduce or defer payments.
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Many creditors are often receptive to the idea, he added.
“If someone is drowning, you don’t want to throw them an anchor,” he noted. But borrowers, he added, often don’t communicate their financial struggles.
That also included credit card payments, said Grant Bazian, a licensed insolvency trustee at MNP. “They could do what’s called an informal proposal by trying to reach out to those unsecured creditors to see if they can compromise,” he said.
“It’s difficult, but it is possible,” he added.
Canada’s big six banks have said they are ready to reduce interest rates on credit cards — in some cases by up to 50 per cent — to provide relief to customers affected to the COVID-19 pandemic.
Asking for help from family and friends may be another option for some, said Grant Bazian, a licensed insolvency trustee at MNP. And, for those who have or qualify for one, borrowing from a line of credit can be a way to cover some expenses at relatively low cost, he added.
For his part, Bryan hopes his experience will help others avoid costly mistakes.
“Thankfully I’m in a position where it’s not going to destroy my life if I have to pay back this money to get out of the agreement,” he said via email.
“What if I was a single mother trying to support her kids during this time and I didn’t have the options to ask for help like I’m able to,” he added.
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