Nearing the end of the month, many of us have received phone calls or emails from various financial firms promoting credit repair loans or so-called ‘savings’ loans. The question that pops up in everyone’s mind is, “Are these Credit Repair Loan or ‘Savings’ Loans worth it?”
Understanding the Offerings
These companies, from the outset, seem to offer a mixed bag of services. It’s not immediately clear if they operate as a lender, credit repair agency, or a savings company. To understand their offerings, one must dive deep into the fine print and ask the right questions.
The Concept of Savings Loans
Companies that offer saving loans promise to provide you with a loan of up to $5,500 to kick-start your savings journey. They claim that this money can be used for emergencies or even leisurely activities like vacations. They further sweeten the deal by saying that as your loan progresses, you could potentially save on interest rates, thus qualifying for better rates on more significant loans like car loans or even a mortgage.
However, let’s delve into how these programs actually work:
Let’s assume a client borrows $1,200. The contract stipulates that he will make weekly payments of $9.70 over three years to repay the total amount along with an interest at a rate of 15.99%. Additionally, there is a loan setup fee of $200. This means that the borrower will pay $511 in interest and fees on a three-year loan of $1200, or an equivalent interest of just over 26%.
Regarding the savings aspect, the lender deposits $1,000 (after deducting the $200 setup fee) into a Guaranteed Investment Certificate (GIC) for the borrower. However, this GIC secures the original loan, meaning the borrower cannot access this money immediately. Access to the fund is granted gradually as payments are made. Essentially, the client doesn’t have $1,000 in savings until the end of three years, and these savings cost $1,511 in payments.
Analyzing this structure, it’s clear that if the objective is to save money, the client is better off doing so independently.
But what if the aim is to improve your credit score? These loans generally appear on your credit report as a term loan. The loan provider’s position is that a term loan of this type will help you rebuild your credit. However, when compared to a credit card, the real interest cost of these loans is higher. With a credit card, you can make purchases and if you pay the balance in full each month, you can rebuild your credit at a much lower cost.
There are other companies and programs that offer loans that will be reported on your credit report, including some offering credit score improvement programs. But they often come with substantial fees or costs.
Ultimately, the decision lies with you. You need to decide if getting a credit repair loan or getting an unsecured or secured credit card is the right move for you.
Strategic Credit Repair
I typically advise my clients to consider a secured credit card, a small unsecured credit card or a small loan as a way to begin rebuilding credit after filing a bankruptcy or consumer proposal. Used wisely, these forms of new credit will allow you to rebuild your credit history by keeping your monthly usage well below the actual limit, thus showing the lender that you can repay your debts each month. The same approach is suitable for anyone with bad credit today who would like to improve their credit rating.
Enroll for Free
It is worth noting that you will eventually need to demonstrate that you can manage larger term loans such as a small car loan. However, it is uncertain if borrowing money and paying substantial interest and fees under these credit repair programs will repair your credit score any faster than a less expensive credit card or other alternative.
I advise you to borrow money only if you need to do so. As the old adage goes, you can’t solve a debt problem with more debt.
Key Advice
1. Set a Goal: If you don’t foresee a need to borrow in the future, don’t waste money trying to rebuild your credit. If your goal is to finance a car, or even a house, work towards that.
2. Crunch the Numbers: Paying $1,500 to end up with $1,000 in savings may not be your best option. While an unsecured credit card looks more expensive because the interest rate is 29.9% compared to 15% (in our previous example), when you compare fees ($200 versus $84) and the fact that you can pay zero in interest if you pay off your credit card balance each month, the unsecured credit card is now clearly much cheaper.
3. Make an Informed Decision: Only you can decide which goal is most important for you and how much you are willing to pay in fees and interest charges to accomplish that goal.
If you are considering credit repair companies because you have too much other debt to qualify for a loan at a good rate, consider the option of eliminating your old debt first. Eliminating debt is often the first, real step to rebuilding credit.
Conclusion
When it comes to Credit Repair Loans or ‘Savings’ Loans, remember that they may not be the most cost-effective or efficient way to save money or improve your credit score. Always weigh your options, consider your financial goals, and make an informed decision. It’s your money, and you should decide how best to use it.
