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DEBT RULES

Here’s how you can get ripped off by lenders

Here’s how you can get ripped off by lenders

A recent MNP survey indicated that 60 percent of responders didn’t necessarily understand the impact interest had on their debt repayments.

This is concerning, because the same survey came to the perennial conclusion that Canadians are $200 away from not being able to pay their bills. And that’s when the interest kicks in. If those missed bills include credit card or line of credit payments, your credit rating can take a hit. Or even worse, you need to turn to payday loans which build up and are incredibly difficult to escape from.

Silver lining though, it’s not just millennials:

“I’d say Canadians of all ages and demographics don’t entirely understand exactly how interest is charged on their debts,” said Shannon Lee Simmons, Founder of New School of Finance, told VICE Money in an email. “I think that there’s a lot of financial jargon out there and financial institutions don’t always make it very easy to understand how you were charged.”

She tells me that where people can get tripped up is how there are different rules depending on what kind of debt you hold.

“For example, credit card debt is actually interest free until you carry a balance past the due date. So, if you always pay your balance, you never actually get charged,” she wrote. Okay, pretty basic stuff.

However: “If you took a cash advance, that may have a higher rate than simply a balance from purchases, and you don’t get a “grace period” with cash advances. The interest you’re charged is calculated in one of two ways: Average daily balance method or daily balance method.”

Beyond if the interest rate has tiers, those interest rate end up being very similar. Now if you make the decision to take out a payday loan, the rules do get more ridiculous due to their advertising methods.

Payday loans are advertised as set loans that cost another specific amount. As of this writing in Ontario, you can apply for a $300 and payback an extra $54 within two weeks. No mention of the actual interest rate. That’s probably because the interest rates on payday loans are insane.

If you calculated that, it’s an 18 percent interest rate. Not bad, until you realize that that’s only for the two weeks and every other relevant interest rate is per annum. Calculating that for the year gives you a 469.28 per annum rate (if that’s a little higher than you get, there are reasons).

Even knowing all of this may not address the root causes of Canadians debt, and those are spending habits. Simmons thinks that stopping the cycle of overspending is more important than knowing the nitty-gritty of your interest rates.

“How do you make ends meet again? Can you earn even $50 more a month? Can you reduce rent by $75? Small things to help conserve more cash flow to start hitting the debt principal and stop the bleeding.” she said. “How the debt or interest is calculated is important but secondary to the larger issue of being in the cycle in the first place.”

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