High interest loans: what you need to know before you sign

Posted on 4 December 2023

Written by Colin Boulton

In a financial climate where interest rates keep rising and there is a rising cost of living, many of us might make financial decisions that are not necessarily our first resort. With limited funds, you might face a financial emergency, or unexpected life circumstances, like a divorce, job loss, or medical expenses. In these scenarios, you might turn to a personal loan to tide you over until you receive more funds. Not all loans, however, are created equally. Some loans come with higher interest rates than others. Although they might provide immediate relief, they do come with risks that all borrowers should be aware of before signing any agreement. In Canada, like many other countries, there are regulations and considerations to make when it comes to high interest loans that you should know before committing. In this article, we share all you need to know about high interest loans and what to take into consideration before you sign any agreement.

What are high interest loans?

High interest loans are most often payday loans or short term loans, and offer quick access to funds. They are lump sums of cash that you can borrow throughout Canada, often coming with quick approval and easy requirements. They were originally intended to bridge the gap between paycheques (hence the term ‘payday loans’), and have a short repayment term of 14 days following the deposit of your funds. While they might offer a quick and easy method of borrowing money, these loans often come with significantly higher interest rates compared to traditional bank loans. For instance, the interest rates on payday loans in Canada typically range from 300% APR up to 500%, making them one of the most expensive ways of borrowing money. APR is essentially the fee for borrowing money, and is typically added to a debt on a monthly basis. Say, for instance, you borrow $1,000 with an APR of 300%. This would make the monthly rate 25% (300% / 12 months), meaning that for as long as you owe $1,000, you will be charged $250 each month. This can make what appears to be a quick cashflow fix a very expensive activity.

Are high interest loans regulated?

In Canada, each province has its own regulations governing high-interest loans. This includes rules around the maximum interest rates and fees that lenders can charge. It is crucial to understand these regulations as they can significantly impact the overall cost of borrowing. In Ontario, for instance, the maximum cost of borrowing for a payday loan is capped at $15 per $100 borrowed. Understanding these caps and regulations can help you to make informed decisions and protect yourself from predatory lenders.

What should you know before signing for a high interest loan?

There are a few key considerations to make before signing for a high interest loan:

  • There can be hidden costs and fees. For this reason, you should always carefully read the fine print associated with the loan. Lenders might impose additional fees beyond the interest rate, like administrative costs or prepayment penalties. These fees can vary from loan to loan to catch borrowers off guard, so make sure you understand and ask questions if you are still unsure.
  • High interest loans can impact your credit score. Although high interest loans can provide quick cash, defaulting on payments or making late payments can have severe consequences on your credit score. This in turn can negatively affect your creditworthiness, making it increasingly difficult for you to secure loans or credit in the future.
  • Explore alternatives to high interest loans. You should always look for alternatives before choosing a high-interest loan. Other options include negotiating a payment plan on debts with your creditors, seeking support from credit counseling agencies, or substantially reducing your debt or clearing it altogether with a consumer proposal or a bankruptcy.
  • If it feels too good to be true, it probably isn’t the right decision. Follow your gut and question, question, question. You’re likely in a vulnerable position, and lenders prey upon your vulnerabilities. If you believe something isn’t quite right, it probably isn’t. 

Tips for signing for a high interest loan

Here are some of our tips for signing any high interest loan agreement in Canada:

  • Research loans: you should ensure you understand the regulations in your province regarding high interest loans
  • Compare between loans: shop around and compare different lenders, looking not only at interest rates but also additional fees and repayment terms
  • Read your agreement carefully: you should review the loan agreement thoroughly, including the fine print, to understand all terms and conditions and to make sure you can feasibly meet the terms
  • Assess the repayment terms: ensure that you can afford the repayment terms without further financial strain on your circumstances
  • Explore your alternative options: high interest loans are the most expensive way to borrow, and often offer unfavorable terms. You should consider other borrowing options or financial assistance programs with more favorable terms
  • Speak to a Licensed Insolvency Trustee: Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. This makes them well placed to advise you when you are facing financial challenges. At Spergel, we have been helping Canadians to gain debt relief for over thirty years, and can review your financial circumstances and make recommendations on what to do in your situation

High interest loans: FAQs

Here are some of the most commonly asked questions we hear from Canadians about high interest loans:

What is the highest interest rate for a loan in Canada?

The highest interest rates for loans in Canada are typically associated with payday loans or short term loans. The specific maximum interest rates that lenders can charge vary across provinces and are regulated by each province’s legislation. In Ontario, for example, the maximum cost of borrowing for a payday loan is capped at $15 per $100 borrowed, and in British Columbia, the maximum charge for a payday loan is 15% of the principal of the debt. These regulations are put in place to protect consumers from predatory lending practices and excessively high interest rates. That said, interest rates can vary based on the type of loan, the lender, and the borrower’s creditworthiness. If you are looking to borrow, it is essential that you are aware of the regulations specific to your province or territory and thoroughly understand the terms, conditions, and total cost of borrowing before agreeing to any loan. At Spergel, we always recommend exploring alternatives to high interest loans, especially if there are more affordable options available, in order to avoid excessive interest payments which can lead to even greater debt.

Where can I borrow money fast in Canada?

In Canada, there are several means to borrow money quickly, depending on your needs and financial situation. Here are some of the most common options:

  • Banks and credit unions – if you have a good credit score and an established relationship with a bank or credit union, they might offer you a personal loan or line of credit with a relatively low interest rate
  • Online lender – various online lending platforms offer quick loan approvals and fund disbursement. You should be extremely wary, however, that these loans often come with high interest rates, especially for those with less-than-perfect credit
  • Payday lenders or cash advances – payday loan companies offer quick access to small amounts of money but often come with the highest interest rate loans on the market. As the most expensive way to borrow, they should be considered carefully due to their high cost
  • Peer-to-Peer (P2P) platforms – P2P platforms connect borrowers with individual investors willing to lend money. The approval process can be relatively fast, but interest rates are usually much higher than traditional loans
  • Credit card cash advances – if you have a credit card, you can take out a cash advance, but you should note that interest rates on cash advances are typically much higher than regular purchases and might incur additional fees
  • Borrowing from family or friends – this option might not involve interest rates or formal agreements, but it is essential to handle borrowing from loved ones with care to avoid straining relationships

If you are at the point where you are considering taking out a high interest loan, you likely need to speak to a Licensed Insolvency Trustee. Instead of putting a band-aid over your financial challenges by taking on more debt, at Spergel, we can help you to resolve your finances once and for all. We have helped over 100,000 Canadians in all kinds of financial difficulties, working to review their circumstances and help to either reduce their debt by up to 80%, or eliminate it altogether. While borrowing money fast might provide immediate relief, it is crucial to assess the total cost of borrowing and your ability to repay to avoid falling into a debt trap.

Why is Canada’s interest rate so high?

It is no secret that Canada’s interest rates are high, having experienced multiple interest rate increases recently, although they are similar to a number of other countries. The interest rates set by the Bank of Canada primarily influence the country’s economy, affecting borrowing costs, spending, and economic growth. The current interest rate might be perceived as high due to a number of factors:

  • Inflation – if inflation rates are high, banks might increase interest rates to curb spending and stabilize prices
  • Demand for credit – high demand for credit and loans can influence interest rates
  • Monetary policy – the Bank of Canada sets the overnight rate which influences commercial banks’ interest rates, affecting the rates offered to consumers and businesses
  • Risk factors – if you have a poor credit score or riskier financial profile, you may face higher interest rates due to the increased risk for lenders
  • Type of loan – short-term, unsecured loans (like payday loans) tend to have higher interest rates due to their riskier nature, and the lack of collateral
  • Global economic factors – fluctuations in international markets or changes in global interest rates can indirectly influence domestic interest rates

As interest rates currently remain high, we recommend addressing your financial issues at source, instead of taking on additional expensive debt. You can speak to one of our experienced Licensed Insolvency Trustees for advice on the most suitable and affordable ways to borrow, or indeed to substantially reduce or clear your debt for good.

Although high interest loans can offer quick solutions during financial crises, they come with serious risks and potential long-term consequences. Being well-informed, understanding the terms, and assessing your ability to repay are crucial steps in making a responsible borrowing decision. Book a free consultation with a Licensed Insolvency Trustee at Spergel to understand your options and to learn how to clear your debt for good.

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Colin Boulton

Colin Boulton

Colin Boulton is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on unemployment and wage garnishments and manages Spergel's offices in Eastern Ontario (including Oshawa, Peterborough, Lindsay, Ajax and Scarborough). When not at the office helping clients cross their debt-free finish lines, Colin enjoys training for and participating in triathlons.

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