“Never dig yourself into a debt pit.”
This is a prevalent saying amongst financial advisors and experts. As a professional in the financial industry, I have had countless discussions every month with people who are battling with colossal debts. The vicious cycle of uncontrolled credit card spending, unexpected events like sickness or unemployment, and the struggle to keep up with monthly bills, is a common narrative. Often, these individuals resort to third-party lenders or “C-grade” lenders for what is commonly referred to as “debt consolidation” or “installment loans”. Unfortunately, these loans are usually characterized by exorbitant interest rates and aggressive debt recovery strategies, making it almost impossible for the borrowers to free themselves from this debt trap.
Understanding C-grade Lenders
In the financial industry, lenders are categorized into different tiers or grades based on their lending criteria and the interest rates they offer.
“A-grade” lenders are traditional banks that prefer to work with clients who have strong credit scores and a steady income flow. These include institutions like Scotiabank, TD, BMO, and CIBC, which are heavily regulated by the government. In exchange for good credit behavior and regular income, these banks offer low-interest rates.
“B-grade” lenders, like Equitable Bank, are more lenient with their lending criteria. They provide loans at relatively higher interest rates. These lenders are ideal for individuals who may not meet the stringent credit requirements of A-grade banks due to insufficient credit history or unstable income. B-grade lenders are often the first choice for new immigrants looking to buy their first homes because they don’t have the required credit history to secure a loan from more established banks.
“C-grade” lenders, on the other hand, are completely unregulated, private institutions that grant loans easily but at extremely high interest rates. Many C-grade lenders don’t perform any credit checks or stress tests, making them an attractive option for desperate individuals seeking quick financial relief. Many of these lenders charge up to 59% annual interest on a loan and require collateral such as your home, car, or other assets, thereby putting you at significant risk.
Debt Consolidation: A Double-edged Sword
C-grade lenders often provide a product known as an installment loan. This loan allows you to pay off your individual bills by offering you a lump sum amount, usually at an interest rate as high as 59%. While these loans seem incredibly easy to secure, they are the second fastest growing type of debt in Canada, according to a recent Equifax study.
An investigation by CBC Marketplace revealed that a $5,100 loan given for a 36-month term actually cost the borrower a staggering $13,400, nearly three times the original loan amount.
These lenders often use manipulative marketing strategies promising rapid approvals and quick cash, while burying prospective borrowers in complex statistics and figures. These high-pressure sales tactics are designed to convince you that you’re getting a “great” deal.
Before considering a loan from a C-grade lender, it’s crucial to ask the following questions:
- What is the interest rate?
- Is it an interest-only loan or principal and interest?
- What is the penalty for late or missed payments?
- What is the final repayment amount?
- Is there a penalty for making larger payments in a particular month?
- What is the actual monthly cost?
- What other terms are hidden in the fine print?
Government Warnings
The Financial Consumer Agency of Canada has repeatedly cautioned individuals about the risks of short-term loans from private or C-grade lenders. In April and August 2017, the government warned against companies that misrepresent themselves as debt solution providers, promise quick credit score fixes, or offer high-interest loans as the “best option.”
Regrettably, these warnings have not deterred Canadians from accumulating debt with these lenders. The Financial Post reported that one of the primary causes of Canada’s increasing insolvency rates is C-grade lenders offering high-interest loans.
Better Alternatives
If you’re in a situation where you need a short-term loan to settle bills quickly, I recommend contacting a Licensed Insolvency Trustee. These professionals are the only ones who can effectively intervene between you and your creditors to end your crushing debt. The ultimate way to free yourself from debt is not by accumulating more but by halting it.
A Licensed Insolvency Trustee has the legislative authority to negotiate with bill collectors on your behalf. On average, our clients pay about 37% of their outstanding debt without any additional fees or expenses.
Whether you’re contemplating an installment loan or struggling to repay one, get in touch with us. We can intervene between you and your creditors and provide relief from creditor calls.
