So I normally don't dish out specific investment advice (i.e I won't tell you exactly which stock/bond to buy or sell), but I'll make a quasi-exception here.
I'm not a big fan of GICs (Guaranteed Investment Certificates) given their lousy rates of return, but I understand that some folks might be highly risk-averse. If you're the type of person who really can't stand losing your capital, but would still like to earn some decent rates of return, or if you'd like to partially benefit from the gains of the stock market while not suffering any of the losses, there are some GICs out there for people like you.
RBC (just as an example, as there are other banks/institutions that offer them) offers what they call MarketSmart GICs. These are broken down into two types: Guaranteed minimum and unlimited returns.
Guaranteed minimum returns GICs guarantee you a minimum return, but also impose a maximum - the maximum return is the penalty you pay for principal protection. Unlimited returns GICs give you...well, the name is pretty self-explanatory. The catch with the unlimited return is you only partially participate in the market returns. For example, their Canadian Market-Linked GICs have a participation factor of 35%. This means you'll receive 35% of the rate of return of the market (if it's positive - remember if it's negative you simply get 0% but don't lose any of your invested capital). So if the market is up 10% in any given year, your GIC will get a return of 3.5%. You give up 75% of the potential market return (or in this case 7.5%) in exchange for capital protection.
While any given year can be quite volatile in the markets, if you buy one of these GICs and hold them for a 5-year period, there's a really good chance that you'll get a positive return. While there's obviously no guarantee, historically the stock market tends to return somewhere between 7%-10% per year (on average over a 5+ year period). Based on historical averages, you should be able to get 2%-4% returns on these GICs, but once again no guarantees (though your invested principal is).
Anyway, I thought I'd share this information, since the current low interest-rate environment can make it hard for those looking for guaranteed fixed-income products that can provide more than 0.5% interest rates, and give you a taste of stock market returns without any of the risks.
Of course, if all you're looking for is a moderate return on your savings in the short term, I suggest you check out EQ Bank. They're an online-only bank (much like PC Financial or Tangerine/ING Direct) but they offer interest rates of 2.25% on all deposits all the time. Since they're a member of CDIC, your deposits are guaranteed by the federal government (up to a maximum of $100,000).
Wednesday, July 20, 2016
Friday, July 8, 2016
Why A Payday Loan Is Like Renting A Car
Payday loans (and the companies that provide them) have been getting bad press in the last few years. We've heard numerous times about the exorbitant rates charged by these companies, and there have been calls for tighter regulation, as well as simply shutting the entire industry down. But what's the real deal with payday loans?
A payday loan is typically a short-term loan (usually for a few hundred dollars) and instead of charging you a certain amount of interest on the amount of the loan, they charge you a set fee. For example, in Ontario, MoneyMart will charge you $21 to borrow $100 for a two-week period. In other words, you borrow $100 and have to pay back a total of $121.
The maximum amount a payday lender can charge is set out by provincial legislation. In Ontario, it's capped at $21 per $100 borrowed over a two-week period, while the highest cap in Canada is $23 per $100, and the lowest is $17.
Now, a $23 fee to borrow $100 for two weeks might seem like a small amount of money, but that represents a 23% interest rate over a two-week period. This is equivalent to an annual interest rate of 600% (well, 599.64% if you want to be technical about it). See here for more information. Given that Payday loans aren't supposed to compound, that's simple annual interest, not compounded.
This is where most people get all up in arms about the whole situation. A 600% annual interest rate? Outrageous! Who would borrow money at such an outrageous amount? Turns out, a lot of people. How are they allowed to charge so much? Isn't there a law capping annual interest rates at 60%? Well yes, there is a section of the Canadian Criminal Code (section 347 to be exact) that limits the aggregate of all fees, interest, charges etc. to 60% per annum (with the exception of a few select fees like overdraft).
But then there came Bill C-26, which recognized, and made an exception for, payday loans. So while banks, credit card companies and even pawn shops can't charge you more than 60% interest per year, payday loan companies can (since their loans have to abide by a certain set of rules, such as being capped at $1,500 and having a term of no more than 62 days).
Carday Lenders
Let's compare payday lenders to the "payday lender" of automobiles, the car sharing program (such as Zipcar, CarShare, etc.) These car-sharing programs allow you to rent a car for as little as an hour at a time (though you can essentially rent it indefinitely if you so choose). Zipcar will charge you around $11/hour or $89/day for renting entry-level cars (such as a Honda Civic). If you were to rent that Civic from Zipcar for $89 for an entire year, you'd have paid over $32,000 - which is far more than what that Civic actually costs. You can rent a Civic from a traditional car rental company (such as Enterprise) for as little as $40/day or so. If you were to lease it from Honda, the base model Civic would cost you around $10/day (including taxes!). So renting from Zipcar costs nine times as much as leasing from Honda.
You could almost compare them like this (sort of, anyway):
Leasing from Honda = borrowing from a bank
Enterprise car rentals = borrowing on a credit card
Zipcar car rentals = Paypday loans
Zipcar (and others like it) sell you a product, namely the short-term use of a car, and they charge you a large premium for doing so. Payday lenders do the same - they charge you a (very large) premium for the short-term use of money. All you need to get a payday loan is be of the age of majority, have a bank account and a job. That's it. No credit checks, background checks or anything like a traditional lender would do.
You don't often see people complaining about auto-sharing programs, even though the rental costs are outrageous. Why? Probably because it's a product that fulfills a need people have, and they are willing to pay for it.
Final Thoughts
Payday lenders could be seen in the same light. They offer a product people need and are willing to pay for. Heck, now payday loan companies often have to post the effective annual interest rate, which means you can see (before you even walk up to the counter) that you'll be paying an equivalent interest rate of 600% per year. It's not like it's a secret.
The one big difference, of course, is that people who use auto-share programs often do so for convenience and as a lifestyle choice (though for some, it's because they can't afford to spend all that money on buying a car outright, and only need a car for a few trips a month/year). These people typically don't sign up for Zipcar because they're in financial distress. Conversely, people turn to payday loans usually because they're in a financial crunch. You don't resort to paying 600% annual interest rates as a lifestyle choice. That being said, for some, the payday loan is used in times of occasional (and temporary) cash flow issues.
Another argument that can be made in favour of payday loans is that they cater to a segment of the market that wasn't previously being filled. Some people would likely go bankrupt, end up homeless or go hungry were it not for payday lenders.
Personally, I think that while payday lenders aren't really any different in concept from an auto-sharing program, they cater to people who are typically in financial distress. But I don't know what the alternative is. If payday lenders were shut down, where would these people go? They don't have credit cards, no bank will loan them money, and they're in trouble.
In short, payday lenders aren't the problem - they're a symptom of the problem.
Getting rid of payday lenders without first addressing the underlying societal issues won't solve anything. In fact, in the short term, it may make things worse. Payday lenders will disappear by themselves once they're no longer needed.
So in the future, instead of getting all emo and upset about the payday loan industry, you should be upset that this industry has any (willing) clients at all. Focus your attention and problem-solving skills on the problem itself, not the symptom.
A payday loan is typically a short-term loan (usually for a few hundred dollars) and instead of charging you a certain amount of interest on the amount of the loan, they charge you a set fee. For example, in Ontario, MoneyMart will charge you $21 to borrow $100 for a two-week period. In other words, you borrow $100 and have to pay back a total of $121.
The maximum amount a payday lender can charge is set out by provincial legislation. In Ontario, it's capped at $21 per $100 borrowed over a two-week period, while the highest cap in Canada is $23 per $100, and the lowest is $17.
Now, a $23 fee to borrow $100 for two weeks might seem like a small amount of money, but that represents a 23% interest rate over a two-week period. This is equivalent to an annual interest rate of 600% (well, 599.64% if you want to be technical about it). See here for more information. Given that Payday loans aren't supposed to compound, that's simple annual interest, not compounded.
This is where most people get all up in arms about the whole situation. A 600% annual interest rate? Outrageous! Who would borrow money at such an outrageous amount? Turns out, a lot of people. How are they allowed to charge so much? Isn't there a law capping annual interest rates at 60%? Well yes, there is a section of the Canadian Criminal Code (section 347 to be exact) that limits the aggregate of all fees, interest, charges etc. to 60% per annum (with the exception of a few select fees like overdraft).
But then there came Bill C-26, which recognized, and made an exception for, payday loans. So while banks, credit card companies and even pawn shops can't charge you more than 60% interest per year, payday loan companies can (since their loans have to abide by a certain set of rules, such as being capped at $1,500 and having a term of no more than 62 days).
Carday Lenders
Let's compare payday lenders to the "payday lender" of automobiles, the car sharing program (such as Zipcar, CarShare, etc.) These car-sharing programs allow you to rent a car for as little as an hour at a time (though you can essentially rent it indefinitely if you so choose). Zipcar will charge you around $11/hour or $89/day for renting entry-level cars (such as a Honda Civic). If you were to rent that Civic from Zipcar for $89 for an entire year, you'd have paid over $32,000 - which is far more than what that Civic actually costs. You can rent a Civic from a traditional car rental company (such as Enterprise) for as little as $40/day or so. If you were to lease it from Honda, the base model Civic would cost you around $10/day (including taxes!). So renting from Zipcar costs nine times as much as leasing from Honda.
You could almost compare them like this (sort of, anyway):
Leasing from Honda = borrowing from a bank
Enterprise car rentals = borrowing on a credit card
Zipcar car rentals = Paypday loans
Zipcar (and others like it) sell you a product, namely the short-term use of a car, and they charge you a large premium for doing so. Payday lenders do the same - they charge you a (very large) premium for the short-term use of money. All you need to get a payday loan is be of the age of majority, have a bank account and a job. That's it. No credit checks, background checks or anything like a traditional lender would do.
You don't often see people complaining about auto-sharing programs, even though the rental costs are outrageous. Why? Probably because it's a product that fulfills a need people have, and they are willing to pay for it.
Final Thoughts
Payday lenders could be seen in the same light. They offer a product people need and are willing to pay for. Heck, now payday loan companies often have to post the effective annual interest rate, which means you can see (before you even walk up to the counter) that you'll be paying an equivalent interest rate of 600% per year. It's not like it's a secret.
The one big difference, of course, is that people who use auto-share programs often do so for convenience and as a lifestyle choice (though for some, it's because they can't afford to spend all that money on buying a car outright, and only need a car for a few trips a month/year). These people typically don't sign up for Zipcar because they're in financial distress. Conversely, people turn to payday loans usually because they're in a financial crunch. You don't resort to paying 600% annual interest rates as a lifestyle choice. That being said, for some, the payday loan is used in times of occasional (and temporary) cash flow issues.
Another argument that can be made in favour of payday loans is that they cater to a segment of the market that wasn't previously being filled. Some people would likely go bankrupt, end up homeless or go hungry were it not for payday lenders.
Personally, I think that while payday lenders aren't really any different in concept from an auto-sharing program, they cater to people who are typically in financial distress. But I don't know what the alternative is. If payday lenders were shut down, where would these people go? They don't have credit cards, no bank will loan them money, and they're in trouble.
In short, payday lenders aren't the problem - they're a symptom of the problem.
Getting rid of payday lenders without first addressing the underlying societal issues won't solve anything. In fact, in the short term, it may make things worse. Payday lenders will disappear by themselves once they're no longer needed.
So in the future, instead of getting all emo and upset about the payday loan industry, you should be upset that this industry has any (willing) clients at all. Focus your attention and problem-solving skills on the problem itself, not the symptom.
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