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Gen Y Money Can this instant online debt solution make your borrowing problems worse?

Condoms from Mogo in Toronto.

Kerry K. Taylor/Kerry K. Taylor

People often ask me how I manage my money. It's not that people are nosy, I think they just like being bored.

Explaining how to build a budget, save for retirement, pay down debt and create an emergency fund isn't exciting stuff. I know this because within minutes of talking about cutting costs to increase savings, people start to look sleepy.

I get it. Seeing the benefits of financial prudence takes time and folks today like instant gratification. Heck, I like instant gratification too – especially when it comes to money.

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Canadians love money. Or rather, we love not having much of it.

Statistics Canada recently said our debt-to-income ratio hit 165.3 per cent for the first quarter of 2016. So Canuck households owe $1.65 in debt for every dollar earned, close to an all-time high. I'm going to add to it by spending hard, saving little and paying off only the minimum amount I owe.

But before accepting three pre-approved lines of credit or taking a standing offer for a higher limit on my credit card with any of the Big Five banks, I want to experience the excitement the new financial technology (fintech) culture has to offer by becoming a disruptor and getting indebted to a Canadian online lender.

To get my fintech loan on I started my search not online, but by hanging at a place called the MogoLounge on Queen Street West in Toronto. Within minutes of lounging by a bar of iPads loaded to Mogo.ca loan applications, I was served a chilled bottled water and scored a condom wrapped in a marketing sleeve that asked: "Getting screwed by banks?"

Since feeling screwed by a bank is a Canadian rite of passage, I was into it. With a slick social media presence, a three minute loan application, free credit scores and cool marketing, Mogo targets mobile-savvy borrowing-challenged millennials seeking lower interest loans to pay off their high interest consumer debt.

There's even an educational YouTube series called Adulting101 that teaches grown-up stuff like, 5 Steps to a Rocking Credit Score! "The only thing that says 'I'm an adult' more than financial responsibility is a flight of wine and a plate of expensive cheeses," says an Adulting101 blog post. I'd agree except, being of Generation X with a toddler in tow, I'd say nothing made me feel more adult than wiping baby barf off my shoulder.

Anyways, enough reality. Back to my loan party.

Since I am an adult, I decided to do the grown up thing by getting educated on Mogo's loans. With their head office in Vancouver, Mogo says they have over 200,000 members and have given over 1.2 million loans since 2007.

The cool kids with great credit scores get MogoLiquid – a $5,000 to $35,000 term loan with annual percentage rates from 5.9 per cent to 45.9 per cent (APR). At the lowest rate, you're paying about $295 a month to borrow five grand. Then there's the MogoMini line of credit – it comes with a 47.7 per cent APR, plus fees. Lastly, there's the payday loan product called MogoZip. To borrow one hundred bucks for 14 days you'll pay $10.50 – that works out to a 273.6 per cent interest rate.

OK guys, who's screwing who?

Doing the math, a maxed-out credit card at 19 per cent is a heck of a lot cheaper than a Mogo line of credit at 47 per cent. My plan to join the indebted Canadians who pay off loans with more loans was heading into the hole, fast.

So I pocketed my free condoms, downed my bottled water, and used my Adulting101 skills to chat with Dave Feller, Mogo's founder and chief executive. I wanted to know who is getting these loans and what credit score is needed to get the lowest most awesome rate?

"The number one reason today why consumers come to Mogo is because they are looking to deleverage out of their higher cost debt," he said in a phone interview. "We generally believe on average we can save consumers anywhere from 25 to 50 per cent on what they are currently paying elsewhere."

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"We essentially say, 'Come to Mogo, take three minutes, and just see if you qualify for a better rate,'" he said. "Obviously if you don't qualify for a lower rate we wouldn't expect you to take it. Worst case scenario is you've got a free credit score and there is zero impact to your credit to do that."

But what credit score is needed for each loan? I asked Mr. Feller three times. No dice. Mogo uses an algorithm built from years of data to determine which loan you qualify for and at what rate. If you have a 700 credit score but are maxed out on all credit sources you're unlikely to qualify for the lowest rate, said Mr. Feller.

So what's the solution? I asked Laurie Campbell, CEO of Credit Canada Debt Solutions Inc., what's an indebted borrower with multiple loans to do?

"Online lenders have found a niche because many financial institutions are not willing to provide anything to consumers who they consider high risk," she said.

"Unless people look at the root causes of their financial difficulties and why they've gotten themselves in over their head financially, chances are they are going to get a loan to consolidate this high interest debt and then continue to use those credit cards that are now paid off in full."

Ms. Campbell's plan for attacking debt:

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1. Create a specific debt repayment plan that details a timeline, interest rates and the amount of debt to pay off. Pick a debt retirement day.

2. Create a budget. "Are you really living paycheque to paycheque or are you making seriously problematic financial decisions that have resulted in the debt?"

3. Track your expenses. "Are there areas you can cut back on?"

4. Include family. "A lot of times people try to do this solo and they have one partner out spending. Make sure the whole family is on board," she said.

5. Ask your financial institution for a rate reduction.

6. Visit your bank or a not-for-profit credit counselling service for ways to manage your finances with recommended courses of action.

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"If you've got your act together and all those things in place then you have an educated mentality going into this loan," said Ms. Campbell.

With my new and exciting fintech indebted lifestyle quashed by the reality of a 47.7 per cent APR online loan, I decided to go back to being my boring money-saving self.

Now to figure out what to do with those condoms.

Kerry K. Taylor is a personal finance and consumer expert, the author of 397 Ways To Save Money and the lone blogger at Squawkfox.com.

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