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Avoid the debt trap

There is a new predator on the loose in Canada, even in Prince George.
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There is a new predator on the loose in Canada, even in Prince George. Last week, I received several fantastic offers for fast and easy loans for which I was already qualified! That certainly was nice news and while I had no immediate need for $15,000 it was nice to know that help was there if it was needed. While I knew payday loans charged very high interest rates, often trapping borrowers in a upward spiral of debt, I wondered if these new "installment loans" were better or worse.

After a bit of digging, it turned out they were worse, much worse.

So I decided to check this out to see how helpful they might be.

Arbitrarily, I decided I needed $11,450 for "debt consolidation."

So I entered that on the nice sliding scale provided. As for the term of the loan, I took the longest - five years. My monthly payment would have been $604.04 and, in the small print (albeit in red) the APR was finally disclosed in the last screen of the application as 59.9 per cent. So, my $11,450 loan would cost me $36,242.40.

Nor was that necessarily the end. There were late payment fees and other charges that might quickly add up. Wonder of wonders, I could insure the loan, so that if I were disabled or killed the loan would be paid off. I did not get a firm price on this option, but it would apparently be a little over $100 monthly. Over five years, that's $6,000.

Compare that to a chartered bank, and assume a reasonable credit history, a loan of $11,450 over five years, and the bank loan of $11,450 would have a monthly payment of $238.80 with interest at 9.2 per cent. The highest interest rate at this bank was 15.5 per cent which would be a monthly payment of $271.47. Using the highest interest rate, that amount paid to retire the loan would be $16,288.20, or almost $20,000 less than the "installment loan" offered. At a credit union a lower rate interest would be likely, reducing the cost even further.

"We can GET YOU that NEW CAR." Well, yes they can. Once again, the interest rate might be as high or higher than the installment loan above, but to lessen the monthly payments, the term of the loan might stretch to seven, eight, or even 10 years.

Mortgages from second rank lenders also need careful attention. When normal rates were three per cent, more or less, I saw mortgage rates of 29.5 per cent. And most mortgages have a shorter term - normally five years.

At the end of five years, without further agreement, a balloon payment is due of the total amount left owning. Or, it can be extended with a new rate that might be higher. "Resetting" a mortgage can be a disaster for those who took out a high mortgage at low - perhaps even under market rates at the time - and are now confronted with rates of nine, 10, and 11 per cent or higher.

Summing things up, when looking for a loan get some third party advice before signing your life away.

Willow Arune,

Prince Geroge