Buy Now, Pay Later: The Risks of Short-Term Loans
Thanks to inflation, higher taxes, and some questionable government decisions, the cost of living in Canada has never been higher. For example, soaring food costs have dealt a heavy blow to household budgets—food banks are reporting record-high demand for necessities. Canadians from coast to coast can feel the strain.
As a result, many have turned to alternative loan options. Among these are risky Buy Now, Pay Later (BNPL) loans, which introduce a new set of financial challenges.
Beware! Not All Lenders Are the Same
Believe it or not, loans and the lenders who give out loans operate with different conditions. There can be a huge difference in loan terms, from payment schedules to the interest rate charged. Some rates can vary between five and thirty-five percent, sometimes higher.
The poor soul that stumbles into a 30% interest rate loan may never repay that loan, as the interest will accumulate too fast. That is one of the key risks with BNPL.
In addition to surprise interest payments, many small loan or instalment loan lenders will have administrative fees or surcharges buried into the paperwork. These fees can be substantial and add years to the payback schedule.
So, if you are interested in a micro-financed loan from a BNPL service provider (e.g. Affirm), ask yourself these key questions first:
- Is the interest rate acceptable (less than 10%)?
- Are there any surcharges or fees?
- What is the total amount of administrative charges in addition to the loan balance?
Don’t forget that you have the right to know the answer to these queries. If you do not like what you see, you can walk away and look for a different lender, no different than shopping for a pair of jeans.
What About Layaway Plans?
Some retail stores offer layaway plans, where they set aside a desired product until you can make full payment over time. If offered by the retailer, this loan arrangement may be a good idea, as there is often less interest or other fees.
The risk with layaway plans is if the store closes. You make regular payments but end up with no product and have no recourse for the money owed to you.
Budget, Budget, Budget!
One of the best ways to fight back against the cost of living and skip all the risks of a short-term loan is by budgeting. We like to say that the more you know about your monthly budget, the better off you will be. Budgeting is well within what you can control as an individual; we highly recommend it as a debt strategy. When you know how much you can spend, you stay out of debt and away from Buy Now, Pay Later loans.
Debt Management
If you have reached the point where you have several short-term financed loans (payday loans, instalment loans, or credit card advances), you may need to do some debt management. Don’t despair—there are several ways to manage unsecured debt and get back on track. Here are a few options:
- Consolidate: Talk to your bank and see if you can qualify at a lower interest rate.
- Opt for a Consumer Proposal: A Consumer Proposal is a federal government debt consolidation plan that will stop the interest on your unsecured debt, stop collection pressure, and often allow you to offer to repay a portion of your debt over time, subject to a creditor vote.
- File for Bankruptcy: Bankruptcy is another federally approved process designed to give the honest person a fresh start. It can sometimes be the fastest, least expensive way to reset.
Note: You must file a Consumer Proposal or Bankruptcy via a Licensed Insolvency Trustee.
Conclusion
It is safe to say that everyone over the last few years has felt the increase in the cost of living. If you need short-term loans to make it through the month, we hope the ideas mentioned in this article are helpful. No matter what, you can start today to control the risks (budgeting, tracking expenses, etc) and avoid bad loans.
If good budgeting is still not enough, please don’t hesitate to contact one of our convenient offices to set up a free initial consultation where we can discuss your individual situation.
