New Vancity Loan. It’s Fast, but Is It Fair?


Category: Bankruptcy News (4) comments

To put it mildly, I’m not a big fan of payday loans.  They carry a very high interest rate, and since you are required to pay them back with your next paycheque they often lead to an endless cycle of obtaining a new payday loan to repay the one you got last week.  Payday lenders are a lender of last resort, where you go to borrow when a “regular bank” won’t give you a loan.

Vancity Fair & Fast Loan, commentary

Banks and credit unions don’t offer payday loans, so I was somewhat surprised to see that Vancouver City Savings Credit Union, a large credit union with 57 branches and $17.5 billion in assets, has decided to start offering payday loans.  They call it the Vancity Fair & Fast Loan™, and if you qualify you can borrow from $100 up to $1,500 and pay it off over up to 24 months.  They say that this loan offers flexible payback schedules, it “can help you establish a credit history”, and you get quick approvals.

Sounds nice and friendly, but I have a lot of issues with these types of loans. Despite the media hype, consumers need to be very cautious before assuming these loans are good credit options.

No cheaper than credit cards

First, the interest rate advertised on their website is 19%.  While 19% is less than a payday loan lender will charge, that’s about the same as the interest rate charged on credit cards by every other bank in Canada, and much higher than the rates on a conventional personal loan or line of credit.  It’s very expensive borrowing.

Not the best credit repair option

Second, while a payday loan “can help you establish a credit history”, a small loan has a minimal impact on your credit score, and so if you want to establish or rebuild your credit score this is not the best strategy.  You pay a lot in interest for minimal benefit.  If establishing a credit history is your objective, get a credit card.  The cost is the same or less if you pay it off, and it’s more flexible.

To control your spending, set a low limit and make sure you pay it off monthly. In fact, showing you can pay off regular purchases on your credit card will have a better impact on your credit report than a small ‘payday’ style loan.

The VanCity Fair & Fast Loan™ is potentially more dangerous than a payday loan

But I’m just “nit picking” here, complaining about high interest charges and a minimal credit score impact.  The bigger issue is that there is no pre-defined limit to the amount you can borrow.

With a payday loan there are limits.  For example, in Ontario, section 35 of the Payday Loans Act requires a payday loan lender to wait seven full days after the repayment of a loan before they can lend again to the same person.  In British Columbia, if multiple loans are given in a short period of time, the borrower must be allowed to stretch out the payments (section 23, Payday Loans Regulation).

Do these rules apply to the VanCity Fair & Fast Loan™?  I hope so, otherwise a borrower could get a $500 loan every month, and stretch the payments out over many months.  With each new emergency you run to your friendly neighbourhood bank or credit union and borrow another $500. Next thing you know you owe $5,000 not $500.  That’s a lot worse than getting one $500 payday loan that must be repaid in two weeks.  At least with a payday loan there are legal limits.

So what’s the solution?

The best solution is to start a savings plan so that you have an emergency fund if you find yourself short of cash.  But what do you do today if your rent is due tomorrow?  I would suggest the first call should be to your landlord, where you explain that while you realize the rent is due tomorrow, you won’t be able to pay it in full until next Friday when you get your paycheque. Your landlord won’t be happy, but it’s unlikely you will be evicted for paying your rent a few days late.

My point is that in most cases you have options, and getting a high interest payday loan should be at the bottom of that list.

I don’t fault the big banks and big credit unions for finding ways to make money.  They are businesses, and they must generate a profit to stay in business.  I’m a businessman as well; I understand.  It’s not the bank’s job to suggest that perhaps you should talk to your landlord instead of getting a payday loan.  There’s no profit in that.

So the solution is that you must take care of yourself.  Understand the full costs of borrowing, and know your options and make a plan to avoid payday style loans.

You’ll be glad you did.

Category: Bankruptcy News |

About J. Douglas Hoyes

Douglas Hoyes, BA, CA, CPA, CBV, CIRP is a Licensed Insolvency Trustee and the co-founder of Hoyes, Michalos & Associates Inc., one of Canada's largest independent personal insolvency firms.

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  1. Community Assist

    I am a member (a customer) of Vancity Credit Union. I am stuck in the current cycle of payday loans due to temporary job loss and contractual work. I have to pay my rent and so I am in this horrible cycle of having to borrow from a payday loan office for 1.5 yrs. If I have 3 loans that I pay off completely within a 62 day time frame, they will allow me 3 pay periods to pay all of it back. So I’ve tried to do this and slowly coming out of it.

    In the meantime I did consult with Vancity regarding small overdraft ($100) secure visa ($500) and the fast and fair loan after reading all the media hype. What they FAIL TO ADVERTISE is that a person is only eligible for these financial services ONLY if the member DOES NOT have any OUTSTANDING collection items. Last year I took a Vancity Financial Literacy program delivered by Family Services of Greater Vancouver – Money Skills Manual (2009). The topic was covered in a very few short hours by an independent, self-employed consultant (obviously) seeking clients for bankruptcy proceedings. This manual is not very well put together in my opinion and in particular Section 5 – Building your credit history.

    Vancity presents itself as a real “community” bank. But I completely agree with your statements their own financial bottom line coming first in their “triple bottom line” marketing tactics. In both conversations I had with the CSR (Customer Service Representative) (who actually placed restrictions on my account which ended up costing me more each month in service fees and who also FAILED to discuss more appropriate/applicable services) and the Account Manager (who changed my account service & credited back the charges that I thought were unfair), neither discussed any credit counselling or relevant solutions. It was actually the payday loan office who suggested that I get a CAPITAL ONE secured credit card to rebuild my credit.

    If I had a simple overdraft of a $100 dollars, what a difference that would have made to the very start of all of this. I find the whole industry has much work to do when it comes to providing REAL service to those who want to rebuild and repair their credit. For myself, it has been a real learning curve and I’ve had to “branch” out on my own to find affordable solutions. I mean, in one case a credit counselling office wanted to charge me $50 to request my credit reports. I was incredulous because I am in debt in the first place! I can order my own credit reporting and make an attempt to negotiate with the creditors directly – saving money. I have some work ahead of me and I don’t feel supported by Vancity at all. I find their community green washing and their media supporters all very frustrating. They are not much better than the big banks in so many ways. This new generation of CSR’s and Account Managers can be very condescending, biased and judgemental without the right training and supports in place.

    Reply
  2. Franklin White

    This article completely misses the point of the Vancity loan. I have never used Vancity’s services, but the point of the product is that it is intended to be an alternative to payday loans. The author nitpicks particular points that he dislikes about the product, but the fact is that this type of loan (from any institution, not necessarily Vancity) is substantially better than a payday loan. The cost is far less, it is nearly as quick/convenient and at least it leads to a chance of a better credit score. Payday loans are multiple times more expensive and have zero chance of helping credit scores. And despite what he says about a borrower potentially re-borrowing from Vancity, that same problem exists with payday lenders. His suggestion that “at least with a payday loan there are legal limits” is misleading because a borrower could just take out loans from multiple payday loan providers and would be paying far more than at Vancity.

    Further, his reference to Section 35 of the Payday Loans Act in Ontario is incorrect. Lenders in Ontario can and will offer you another payday loan the second you pay off your initial one (and this is fully legal – read part (b) of Section 35.1).

    This article seems to be forcing an argument against the Vancity product – and it is a very peculiar critique given the author’s good credentials. Borrowing at 19% is certainly far from ideal – but for some reason, this author seems to indicate that it isn’t much better than borrowing at what is effectively upwards of 1,000%. Don’t let perfect be the enemy of progress.

    Reply
    1. J. Douglas Hoyes Post author

      Hi Franklin. Thank you for your comments. You are correct that a borrower can go from one payday loan company to another. I’m not a lawyer so I’m not going to debate the meaning of Section 35 of the Payday Loans Act of Ontario, which says that a payday lender must wait 7 days before giving you another loan, or can only give you a loan after you have paid off the first one. In other words, they can’t lend you the money to pay off the first loan, which was my point:

      No concurrent or replacement payday loan agreements
      35. (1) The lender under a payday loan agreement shall not enter into a new payday loan agreement with the borrower before,
      (a) at least seven days have passed since the borrower has paid the full outstanding balance under the first agreement; or
      (b) the borrower has provided to the lender proof that the borrower has paid the full outstanding balance under the first agreement. 2008, c. 9, s. 35 (1).

      My point is the same as your point:

      Borrowing at 19% is certainly far from ideal

      Exactly. That’s my point. I agree that if my only choice is to borrow at 19% from Vancity or borrow at 600% from a payday loan company, a 19% loan is better, but my point is that those are not your only two options in most cases. Van City will loan you up to $1,500. This is not a car loan, or a consolidation loan. It’s short term borrowing, just like a payday loan, presumably to pay your rent, or make emergency car repairs, so my point is to suggest to my readers that for relatively small amounts of money, there are often better alternatives.

      If you will be late with your rent, is it better to get a $1,000 loan from Vancity at 19% that you will pay off over a year, or is it better to talk to your landlord and see if they will give you an extra week until your paycheque arrives? Can friends or family help you out?

      All I am suggesting is that all options should be considered, and so even though Vancity brags about the fact that this loan, at 19%, has a “low cost of borrowing”, it’s only low compared to a payday loan, and is higher than most other options.

      Reply

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