Would you consider buying a car using your credit card? With interest rates reaching 25 per cent and higher, most people would scoff at such a silly suggestion.
But a recent CBC report profiled a B.C. couple who signed up for a 25 per cent auto loan. The couple's angst wasn't about the 25 per cent rate they agreed to, but rather about an interest rate reduction that they were allegedly promised after one year, a reduction that never materialized. In the end, the purchase price of their car was $21,000 while the interest added up to $23,000 - more than the price of the car.
The reason they agreed to pay the high interest rate in the first place was because they had recently declared bankruptcy.
Without knowing anything more than the information presented in the CBC story, the couple's particular situation raises some interesting food for thought. Opinions on social media were pretty divided. Some were squarely on the couple's side, suggesting they had been completely taken advantage of.
Others suggested that if the interest rate relief wasn't in writing, they didn't have a leg to stand on and that the 25 per cent interest rate wasn't the issue. After all, how much interest would you charge someone who has in the past managed their credit so poorly that they had to claim bankruptcy? Their previous creditors presumably had to write off a lot of money that was contractually owed to them, some people on social media noted.
Chris Mazur, a trustee in bankruptcy and senior vice-president with BDO Canada Limited, said in an email that, "consumer insolvencies decreased overall by 1 per cent for the 12 months ending October 2013. That is the good news. However, the number of consumer proposals increased more than 4 per cent over the same period." That suggests the appetite for credit is still rampant, and that people with poor credit looking to borrow even more will continue to face high interest rates.
One valid consideration is whether 25 per cent sub-prime auto loan rates could be lower, given that overall delinquency rates are low enough that the overall pools of these loans on lenders' books seem to be fairly profitable. But if consumers continue to accept these terms, the rates will continue to be high. And if payday loans can charge the equivalent of 500 per cent interest, I'm guessing sub-prime or special financing vehicle loans are here to stay.
"Obviously a consumer must take responsibility for agreeing to any contract with onerous rates with no written guarantee to be refinanced to a lower rate," says Eric Putnam, managing director at Debt Coach Canada. Before shopping for a loan, he recommends consumers obtain their credit reports from both Equifax and TransUnion and create a plan to address their overall debt.
Says Mr. Putnam, "Someone who has been through a bankruptcy should be better able to distinguish between their wants and needs and must ask if they really need a newer auto."
Individuals with poor credit should think about getting the help of a financial professional before signing any financial contracts, Mr. Mazur suggests. One option for them is to seek "a non-traditional lending source, such as a relative or friend, and draft a formal agreement with a strict repayment plan" he said.
And if friends and family balk at lending you money, it may be time to get familiar with the bus schedule.
Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network and author of the new book, Stop Over-Thinking Your Money! Follow him on Twitter at @preetbanerjee.