It was only a matter of time before Canada’s big guns started to crack down on payday lenders. And while this crackdown is happening, a new wave of “installment lenders” are actively offering people better terms and services.
In early May, Toronto was the latest of a host of municipalities to crack down on payday lenders. They imposed bylaws to restrict business activities by limiting the number of physical locations and requiring operators to be licensed. Meanwhile, the Ontario government had already decreased the cost of a payday loan from $21 to $15 this year.
With that legislative change has come a bout of competition for payday lenders. The red-hot installment lending industry in Canada, which offers longer payback periods and better interest rates, is growing fast.
“People are going to installment lending more now,” said Kevin Silver, Managing Director at Magical Credit, a Toronto-based online lender. “You have a lot longer to pay back a loan, your payments are smaller and you’re not stuck in a cycle where you’re coming back every month, taking larger loans to pay off your other loans.”
Payday loans are used to cover short-term expenses for a two-week period, but they carry heavy interest rates. Many users end up carrying them for far longer than their next paycheque, and the industry tends to attract those with poorer credit or no other option. With payday lenders, a $15 fee from a $100 loan is not 15% interest. That’s only for the two-week period. Annualized, it works out to 360%.
With online lenders like Magical Credit, clients can get loans between $500 and $10,000 on a one or two-year term with more manageable low monthly payments. Loans typically average between $3,000 and $4,000 and the interest rate is 3.9% per month, or about 46.8% annualized. It’s not as good as a bank line of credit, but it’s not even close to a payday lender’s rates.
With Magical Credit, said Silver, approved clients get one lump sum, possibly even the day after they apply. They can pay off their debt and live with one affordable payment without having to take additional loans.
He emphasized that often this type of clientele doesn’t have much choice when their car suddenly breaks down in the middle of winter.
“Banks aren’t going to give them money. So what are they going to do?” said Silver. “If they come to us, they can get that $2,000 loan and pay it off over two years. In literally 20 minutes from submitting an application, you could be approved and get your funds the next morning. There’s a convenience in that.”
And so it comes down to this: does a client have a better option than paying back a $500 loan in two weeks with a 360% annualized interest rate?
“It’s easier to pay back $2,000 over one year than it is to pay back $500 in two weeks,” said Silver. “That’s not rocket science.”
Like any lender, there are conditions. First, clients need to be bringing in a regular paycheque via direct deposit or have a steady source of income from a government subsidy, such as the Canada Child Benefit income, Canadian Pension Plan, etc. They can’t be in bankruptcy or consumer proposal and they had to have paid back any payday loans.
And yet, says Silver, even those potential clients who would be approved still seem surprised on the phone when Magical Credit informs them that they won’t have to pay this off in two weeks. It points to an unfortunate reality with most industries once technology plays a role in its explosive growth.
“There’s a tremendous lack of awareness, understanding and education in the installment lending space. People don’t know the options they have” he told Smarter Loans.
“We get calls every single day to this day asking for $500 because they’re expecting to pay it back in two weeks, and then we explain that, ‘You can have this loan for a year and have small monthly payments.’ They’re surprised because they’ve never heard of such a thing. They’re used to walking down the street to their brick and mortar storefront and walking out with $500.”
But Installment lending, still somewhat in its infancy in Canada, will continue to gain exposure. It will only grow bigger, said Silver. And consider this: throughout the world, the online lending space is already a multi-billion dollar industry.
Along with more exposure and popularity will come serious concerns from borrowers about fraud. Simply put, how can people be expected to trust new players like Magical Credit? Silver says it’s about having frank conversations with potential borrowers about what they should and shouldn’t do.
“It’s very simple. If you’re coming looking for money, there’s no reason you should be giving them money up front. That’s fraud,” said Silver.
“We don’t ask for any upfront fees whatsoever. If you’re approved for $5,000, you’re getting that money in your bank account, period, nothing to talk about. Two weeks later or a month later, that’s when you’ll start paying your installments.”
Beyond that, Silver says clients need to remember to use common sense if they’re looking to borrow.
“Its scary out there, but there’s no reason you should send someone untraceable forms of money. There’s no reason you should ever give out money if you’re asking for money. And no legitimate company will ever ask you for that.”
And while the public grows more savvy about online lending options, places like Magical Credit will be there to help. Magical Credit doubled its client base from 5,000 to 10,000 in 2017 alone and expects attracting another 10,000 to 15,000 customers over the coming year. Suffice to say, Canadians are, in fact, starting to see what’s out there.