As Canadians keep racking up debt, new types of businesses are cropping up across Canada that target those desperate to pay off what they owe or rebuild their credit.
Some of these companies present themselves as financial innovators catering to an under-served slice of the market. But the Financial Consumer Agency of Canada (FCAC), the federal financial consumer protection watchdog, is warning Canadians that these businesses generally charge fees and high-interest rates. Some of them over-promise, and some are misleading, according to FCAC.
The agency issued a press release on Wednesday urging consumers to be “cautious” when looking for help with debt repayments and credit repair.
Among the relatively new products available to Canadians with poor credit scores or little credit history are so-called savings or credit repair loans. These loans, companies that offer them say, will help you build or repair your credit score if you make timely repayments.
Lending to borrowers with poor or no credit history is generally done through secured credit, meaning that to borrow, say, $1,000, you need to leave $1,000 with the lender as a security deposit. This type of borrowing is meant to show that you can make disciplined debt repayments, rather than to gain access to advance funds for expenses for which you don’t have cash at hand.
Unlike traditional secured credit, some savings loans do not require any cash advance, according to documents reviewed by Global News. A lender will set aside the amount of the loan as a security deposit and gradually grant customers access to the funds as they make payments, which count as debt repayments on the client’s credit report.
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FCAC warned Canadians of the steep cost associated with this type of borrowing: “Be aware this type of loan usually has a high-interest rate.”
One loan application viewed by Global News entailed a cost of over 50 per cent in fees and interest over the value of net savings accrued to the customer.
Canadians wishing to start their credit history anew have cheaper options, Douglas Hoyes, a licensed insolvency trustee at Kitchener-Ont.-based Hoyes Michalos, told Global News.
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A secured credit card such as the Home Trust Secured Visa, costs only up to $60 a year in fees and nothing in interest, as long as the monthly balance is regularly paid in full. Late payments incur interest of 14.9 per cent, or 19.99 per cent for the no-fee version of the card. Repayments to a secured credit card also appear on the customer’s credit report, helping to build or rebuild credit.
FCAC also warned that with some companies offering savings or credit repair loans, “you may never actually receive any money because the company will tell you the loan amount will cover its services or programs,” according to FCAC.
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Canadians should also keep in mind that, “it’s impossible to change or erase information that’s part of your credit history unless information is inaccurate. Improving your credit score will take time. You have to show your creditors that your habits have improved and that you are paying back your debt on time,” FCAC noted.
Other types of debt-management products flagged by FCAC
- Companies that guarantee they can solve your debt problems
Some companies claim they can negotiate a deal with your creditors so you’ll have to pay back only a fraction of what you owe.
“You may still need to pay fees even if your creditors refuse to negotiate or make a deal to settle your debt,” noted FCAC, adding that, “you could end up in even more debt than you were in before.”
- Companies that encourage you to take out a high-interest loan to pay off your other debts
Some agencies encourage you to take out a high-interest loan to pay off your debts with the promise that they can negotiate a better deal with your creditors or settle your debts in the meantime.
“Be aware that some companies make money from fees, set-up costs and interest. You may still be carrying debt after the process is over,” noted FCAC.
Some of these businesses may offer to file a consumer proposal or bankruptcy for you for a fee. Be aware, though, that “only a qualified licensed insolvency trustee can help you with a consumer proposal or bankruptcy. Their advice on these two options is typically free,” according to FCAC.
Licensed insolvency trustees are licensed by the federal government’s Office of the Superintendent of Bankruptcy.
Consumer proposals entail paying a portion of your debts, and generally allow you to keep your assets, including your house. Bankruptcy absolves you of many debt charges but normally forces you to sell your assets, with some exceptions.
- Companies that misrepresent services they offer as being part of a government program
Need to fact check whether the debt solution you’re considering is really government sponsored? You can contact the government department or agency responsible for the program. “Ask them to confirm that the company’s representation is genuine,” said the FCAC.
Things to do before signing up for a debt-repayment program
Here’s the due diligence the FCAC recommends you do before you sign on the dotted line:
- Get advice from professionals such as a financial adviser, an accredited credit counsellor or a licensed insolvency trustee
- Read the fine print and compare your options
- When contemplating a consumer proposal or bankruptcy, ask “Are you a licensed insolvency trustee?”
SOUND OFF: What was your experience using debt-repayment or credit repair services? Did you get out of debt or did you feel taken advantage of?
Note: We may use your response in this or other stories. While we may contact you to follow up we won’t publish your contact info.