Those who have taken out a payday loan know how easy it is to get into a cycle of debt, and how difficult it is to break free.
It often starts when someone who is already living paycheck to paycheck incurs an unexpected expense before payday, requiring them to take out a small loan at high interest to pay for it. Because of that high interest rate, however, the amount that is withdrawn from their next paycheck doesn’t leave them with enough to get by until the next payday, and so they take out another loan. And so the cycle continues, putting the consumer deeply in debt, sending a significant portion of a paycheck that’s already being stretched razor thin to a payday lender every two weeks.
“The worst part is, once you’re in that cycle, you can’t get out of it,” said Natalie Bell, the director of operations for Toronto-based online lender Magical Credit Inc. “Say you owe the loan company $1000, your paycheck is $1500, you only have $500 left to live for two weeks, you have two kids, how can you live on just $500? Obviously you need to re-borrow.”
Magical Credit hopes to be a solution for Canadian caught in the payday loan cycle. The online lender provides loans of at least $2,000, averaging between $3,000 and $4,000, on a one or two year term with more manageable low monthly payments. “Our concept is, you’re borrowing a lump sum to get out of the cycle,” said Bell. “We’re going to give you a loan to get out of the payday loan cycle, put you on a low monthly payment plan to pay us back, and get it stopped.”
The company, which currently has 5000 customers, has loaned between $10 and $15 million since its launch three years ago. “If you’re on a one-year term for a $2,000 loan, your payment is around $260 [per month],” said Bell, adding that a two-year term for the same amount results in a monthly payment of $169. “Your affordable monthly payments will help you get out of debt.”
Annual interest rates start at 23%, and can reach 59%, depending on the term, amount and credit history. Though it may seem high it pales by comparison to the 547.5% charge by payday lenders, according to an exposé on Canadian payday lenders by Global News.
In order to qualify, customers can’t be in bankruptcy or consumer proposal, must have a monthly income that is direct deposited into their account and have paid back their payday loans in the past. Those that apply can fill out the online application form in minutes, upload 90 days of bank statements and, following a credit report check, can find out if they are approved for a loan that same day. If they are, the funds are directly deposited into their account within 24-48 hours.
“It’s a simple, fast way to secure funds when you need them,” said Bell, adding that many of Magical Credit’s customers have had negative experiences with banks and payday lenders in the past. As a result, the company sees a re-loan rate of approximately 90%, and has proven that it’s willing to work with customers to suite their unique circumstances.
“If you can’t make a payment, call us. All we want to do is help. We can make a payment arrangement, change the date, make it a lower amount, we don’t want you to feel like you need to avoid us,” said Bell, adding that Magical Credit doesn’t charge the massive late payment fees customers of payday loan companies have become accustomed to.
Furthermore, while some lenders charge penalties for early payments, Magical Credit can accommodate any borrower that wants to pay off their loan early. “You’re actually paying 3.9% interest per month. If you take it for two months and pay us back, you only pay interest for two months, not the full term,” explained Bell.
Though the lender primarily operates online and by phone, with only one office in Toronto, they hope to provide a friendlier, more personal alternative to payday loan providers, says Bell. “If another emergency comes up and you can’t afford to pay us, give us a call, we’ll work out a payment schedule and get you back on track,” she said. “We’re looking to the future, not just as a temporary solution like a payday loan.”
Thousands of Canadians have found the online lender’s approach to be a welcome change from their experience with banks and payday loan companies in the past.