Cody O’Day wanted to borrow money to buy furniture to set up an Airbnb. Instead, he ended up with a loan contract stipulating he would have to pay nearly $4,300 in order to receive $1,750 only after three years.
O’Day signed up for what some call a “credit-repair loan” or “secured savings loan,” in which borrowers receive no money upfront but must make regular payments. Lenders usually release funds either at the end of the loan period or gradually, as they receive deposits.
Savings loans are a relatively new financial product in Canada that some lenders are marketing as a way to help borrowers with a bruised or non-existent credit history. But the loans often come with high interest rates and fees.
O’Day, for example, stood to pay around $1,800 in fees over three years on top of 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 full cost of borrowing including fees, was more than 39 per cent.
Worse, O’Day said he didn’t want that kind of loan at all.
A 29-year-old carpenter in Kamloops, B.C., O’Day said he was hoping to obtain a loan for debt consolidation and for a home renovation to set up a short-term rental that would help him boost his income. With a low credit score, he said he knew he wouldn’t qualify for credit from a mainstream financial institution. So he was prepared to pay a high interest rate to an alternative lender.
But when he called Fresh Start Finance, which offers loans of up to $15,000, in mid-November, he said he was transferred to Spring Financial, which set him up for a savings loan instead. Both companies are part of the Canada Drives Group, which operates a number of consumer finance brands across Canada.
O’Day said he believed he had signed a loan of $2,300, of which he would get $1,750 upfront, which would cost him a total of around $4,300 in interest and fees over three years.
The loan contract seen by Global News clearly states on the first page “you will not get access to any money upfront.” But O’Day said he signed it without reading it while on lunch break at work. He also acknowledges the agent who set up the loan on the phone told him he would not receive funds in advance. However, he said he had at times trouble hearing the conversation because of background noise in his shop. He also said he told the agent he couldn’t hear very well.
It was only later, upon reviewing the terms of the contract and a recording of the call, that O’Day said he realized he wouldn’t receive the money until the end of the loan period.
When he reached out to both Fresh Start and Spring Financial and asked them to cancel the loan, he said he was repeatedly told that wouldn’t be possible.
Spring Financial ultimately agreed to close the account on Nov. 23, before the first payment was due.
“The borrower has not made any payments and no payments are due to be debited from their account,” Tyler Thielmann, vice-president of consumer lending at Canada Drives, told Global News via email.
According to O’Day, the decision by Spring Financial came at the end of a phone call in which he mentioned he had contacted Global News as well as a lawyer.
Insolvency trustee calls the loan ‘predatory’
Documents seen by Global News show O’Day was supposed to pay $55 by-weekly for a total of $4,297 over three years.
That sum included a $2,300 “total loan amount” made up of the $1,750 O’Day would eventually get back, plus a setup fee of $550. The total estimated interest over the loan term would have been $676. In addition, O’Day also stood to pay $604 for a loan payment protection plan and $682 for credit monitoring. Interest and fees would have amounted to around $2,500 over the course of the three years.
The payment protection plan and the credit monitoring service are optional and can be cancelled at any time by providing written notice to Spring Financial, according to the contract. Borrowers can also prepay the total loan amount and any interest accrued at any time without penalty, the documents show.
Still, licensed insolvency trustee Doug Hoyes, who reviewed a copy of the agreement with O’Day’s consent, said the terms of the loan are very aggressive.
“I would define it as predatory.”
A quick way to build credit?
Canada Drives, for its part, calls savings loans an alternative to payday loans.
“This loan gives many Canadians the opportunity they need to rebuild their credit, start qualifying for reasonable interest rates, and most importantly avoid the downward spiral of payday loans,” Thielmann wrote.
Savings loans lenders acknowledge that there are other ways for consumers to build or rebuild their credit from scratch, but generally argue savings loans are a much-needed financial innovation that can help struggling borrowers.
For example, Canadians can turn to secured credit cards, which are backed by a security deposit. This means a credit card with a $1,000 limit may require a borrower to deposit $1,000 with the credit card issuer, which can use the money to cover any missed bill payments.
Thielmann said Canada Drives recommends secured credit cards and refers clients to companies that offer them. Savings loans, however, in which borrowers must make regular payments, are a different type of credit, he noted.
“Banks and lenders generally like to see experience with both types of credit when reviewing credit applications,” he wrote.
Thielmann also noted that some consumers are unable to come up with even the small down payments required to obtain a secured credit card.
“With the SSL [secured savings loan] a customer does not need to provide a lump sum payment or deposit in order to build credit.”
Hoyes told Global News savings loans might help some borrowers lift their credit score fast. Instead of saving up for the deposit on a secured credit card, borrowers start making small payments right away, which may reflect positively on their score.
Spring Financial says it reports all payments to credit bureaus TransUnion and Equifax.
However, Hoyes said, borrowers are often paying a hefty price for that quick credit score boost.
Global News reporting indicates secured credit cards are generally far cheaper than savings loans. Canadians can apply for secured credit cards that cost less than $100 a year in fees and charge interest of 20 per cent or less, according to financial products comparisons site RateHub.ca. And if consumers pay off their balance on time, they won’t incur any interest charges, Hoyes noted:
“What you are paying for with [savings loans] is speed. … Is it worth it?”
There is no guarantee that taking out a savings loan will have a positive impact on a borrower’s credit, something that was clearly spelled out in O’Day’s contract.
“Banks and other potential creditors may view a borrower having too many loans as an increased risk,” the document reads.
Equifax told Global News that “there is no magic bullet or single type of credit account that will build a robust credit history.”
There is also no single “standard” or “master” credit score version. Different lenders have their own credit score versions. The impact of a particular credit account often varies from applicant to applicant based on the other information on their credit file at the time their credit score is calculated, Equifax Canada director of consumer advocacy Julie Kuzmic said via email.
“Developing a favourable credit history and improving an individual’s credit score takes time and the single most impactful thing an individual can do is to pay their bills of all kinds (mortgages, loans, credit cards etc.) on time, every time,” Kuzmic said.
No ‘cooling-off’ period
Regardless of whether a savings loan would have helped his credit score or not, O’Day said he never intended to enroll in one. But when he tried to get out of it, he faced an uphill battle, he said.
The loan agreement reviewed by Global News does not provide for a so-called “cooling-off” period, a short period of time during which applicants are allowed to request that the contract they signed be voided.
In British Columbia, where Canada Drives is based, such a provision is mandatory for payday lenders, which must allow borrowers to cancel a loan by the end of the next day in which they are open for business.
READ MORE: 5 signs you need help with your debt
Recordings supplied by O’Day suggest agents at Fresh Start and Spring Financial repeatedly told him over the phone that his savings loan could not be cancelled. Global News has not been able to independently verify the accuracy of the audio files.
In the call O’Day said was to Fresh Start, which originally referred O’Day to Spring Financial, a person who identifies herself as a manager at the company fails to provide O’Day with an opportunity to cancel the loan, despite his numerous requests. O’Day says that call took place Nov. 18.
In a call that O’Day said took place on Nov. 23, a person who identifies herself as a Spring Financial agent eventually agrees to close the account. However, the second recording also contains what appear to be several initial denials of the customer’s request to void the loan.
“Listen, I have this thing. I don’t want it. I was misled and I don’t want it. So can we cancel this or not?” O’Day says in the call.
“We can’t cancel,” the other person responds.
Later on in the conversation, the same person can be heard saying: “At the end of the day, the problem is you signed these documents.”
“If you misunderstood the product, that’s out of our hand,” she also says.
Canada Drives’ Thielmann said the company is unable to comment on the accuracy or validity of the recordings.
He added that Spring Financial is willing to close loans for customers “as a goodwill gesture,” as long as this happens before their first payment is processed. First, however, the company will transfer customers to its “retention department” to try to “re-educate” them about their financial situation and why they were unable to obtain traditional credit, as well as the benefits of a savings loans, he told Global News.
Thielmann also said that Spring Financial savings loans agreements have plain language disclosure about the conditions of the loans on the first page and throughout the document. Borrowers are required to initial each of the key disclosures. In addition, an agent will verbally repeat multiple times to the borrower that they won’t receive any funds up front, he noted.
A loan to pay another loan
In the recording of the call with Fresh Start that O’Day says took place on Nov. 18, the B.C. man’s interlocutor can also be heard saying that many borrowers pay off the total loan amount of a savings loan well before the three-year term, often by taking out another, traditional loan if their credit situation improves enough for them to be able to qualify for one.
While borrowers may be able to obtain cash loans from any lender, Fresh Start would be happy to help, the person in the recording is heard telling O’Day.
“We are obviously working to be able to help you get approved for a separate cash loan. Because that’s where we make the majority of our money because we are primarily a lending company,” the person said.
Thielmann said after making timely payments on their savings loans for 12 to 18 months many customers are able to access credit from mainstream lenders or Spring Financial.
He added that Canada Drives companies frequently refer customers to each other.
“Our goal is to connect all applicants with the products that are best suited to their situation. When a customer applies with any of our brands they agree to receive offers from the companies in our group or other third parties that we are partnered with,” he wrote.
Lack of regulation
Savings loans may not be “entirely a bad thing,” according to Stephanie Ben-Ishai, a professor at York University’s Osgoode Hall Law School.
They may be a way for high-risk borrowers to demonstrate their ability to make payments over a period of time, she said. And lenders who cater to customers with poor credit or no credit history necessarily have to offer more expensive loans, she noted.
However, some installment loans remain lightly regulated, she added. While provinces have tightened regulations around payday loans over the past decade, “one way to get around that regulation, is to not offer payday loans, but instead to offer different kinds of products,” she said.
“There’s a gap in regulation, basically, there.”
The B.C. government is currently working on regulating high-cost loans and boosting protections for consumers. The new rules will create borrower rights and remedies, set disclosure requirements, and prohibit certain fees, among other things, according to the Ministry of Public Safety and Solicitor General.
In the meantime, though, consumers like O’Day are fending for themselves.
While he is “relieved” that is own savings loan account was closed, “I feel bad for anyone who is stuck in these,” he said.