5 Bad Credit & Debt Products To Avoid

bad debt loansTwo large furniture retailers in Canada, Leon’s and The Brick, are being accused by The Competition Bureau in Canada of deceptive marketing practices surrounding deferred-payment credit options otherwise known as Don’t Pay A Cent Events or Buy Now, Pay Later programs. Even if these retailers fully advise customers up front of all fees and charges, there are certain types of credit products that are bad borrowing choices. Here’s a list of 5 credit products that you should not use and a better alternative for each.

5. Buy Now, Pay Later Deals

It may seem like a good idea to defer your payment for a purchase you can take home today but the end result can be very costly. Up-front fees including administrative charges, higher delivery fees, higher product prices and taxes can increase the cost of the item you wish to purchase well beyond the cash price. Even worse, failure to pay the balance by the due date can result in excessive interest charges (usually at rates higher than even the worst credit cards) and late penalties.

Your responsible alternative? Save up front, look for cash discounts and postpone your purchase until you can afford to pay for the item in cash. If you are going to defer your payment, only do so if you have the cash in the bank to pay for your purchase and run the numbers to see if it makes financial sense (in other words it’s a better deal than cash). Also make sure you pay before the due date just in case there is a delay in processing your payment.

4. Rent To Own or Lease To Own

It might be a convenient way to purchase that new TV or new computer when you don’t have the cash or have poor credit, but like buy now, pay later deals you are much better to wait to buy what you want. The difference between the cash price and your total rental payments can more than double the cost of your item. Plus, by the time you do ‘buy it’, your new TV or computer are now likely obsolete.

If you can afford the monthly ‘rental’ the better choice is to put the rental amount away for a few months then go out and buy what you want with cash, looking for the best cash deal you can find.

3. Tax Refund Loans

You’ve filed your tax return and found out you have a nice (or even small) refund coming. There are several services out there that will offer to give you instant cash for your tax refund, rather than waiting for the tax man. You should understand these offers are really just a loan disguised in rapid refund packaging. Effectively a short-term loan, the ‘discounted’ value you receive is the equivalent to paying very high interest and fees.

The preferred option is to e-file as early as possible. According to Revenue Canada’s website, in most cases if you choose direct deposit you will receive your refund within 8 business days.

2. Pawnshop Loan

This is another form of short term loan (usually a few weeks to a few months) with very high interest rates. Typically you give the pawnshop something you own and the pawnshop loans you a percentage of the agreed upon value of that item. At the end of the loan period you have to pay the pawnshop owner the amount you borrowed plus interest (usually around 3% a month which is the equivalent of almost 43% annually and that is before any fees). If you fail to pay back the loan, the pawnshop company keeps your item which is usually worth more than the ‘agreed’ upon up front price.

A wiser solution would be to sell what you don’t need either through a yard sale or kijiji. If you are having trouble paying your bills, it might be time to sell the extra’s.

1. Payday Loans

Payday lenders rely on the fact that you need cash fast. Unfortunately you will pay a heavy price for quick access to easy debt. Also, you might start out thinking you will be able to repay the debt by the next paycheque, but the truth is, if you are relying on a payday loan once, you will more than likely be a repeat customer.

A better alternative? Borrow from a friend or try for a small loan from your bank but make sure you make this a one time only event to get you beyond the crisis. Then create a small emergency fund savings account to prevent any short term cash shortfall from driving you to bad debt choices in the first place.

All of these debt or loan products are poor borrowing choices. If you find yourself repeatedly using any of these products, you may need help managing your money. If you need debt management advice, consider talking to a professional debt and credit counsellor. Contact a credit counsellor in your area if you need help eliminating your bad debt choices.

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