HOW TO BORROW MONEY
Need $5 till Friday? Or enough to buy your wife and baby back from the hospital? Almost everyone has to float a loan sometime — and it pays to know how in advance
SIX EASY WAYS TO GET IN DEBT-AND OUT AGAIN
ALMOST everybody, it seems, wants a loan these days—and curiously almost everybody wants to lend money. If you’ve got a steady job or some furniture, you can borrow money easily.
There’s only one catch: you’ve got to pay back more than you get.
This fact has produced plenty of headaches for people who didn’t understand how much they had to repay when they borrowed a few hundred dollars because Junior’s appendix had to come out or father needed a good set of store teeth.
The number of loans made each year by small loan companies has mushroomed 88% in the past five years. Credit unions loaned out 60% more cash in 1948 than they did the year before. Personal-loan departments at the banks are stepping up family loans at a noticeably faster rate than
their loans to business. Although their total loans have jumped 24% since 1947, their personal loans have shot up 40%.
And we’re on an installment-buying binge, too. Installment purchases jumped 20% last year, cash purchases only 6%.
Two out of three families now buy house furnishings on credit. Most furs are sold that way, too, and a quarter of all ordinary clothing purchases go on charge accounts. Many people buy coal, hardware—even wallpaper—on credit plans. About half the jewelry bought each year is paid for sometime later, not to mention half the cars. Except for food, 37% of all goods bought last year was paid for later on the installment plan.
More and more people are going into hock for homes, too. The number of mortgages approved under the National Housing Act in 1948 was 72% more than in ’47. And the size of the individual mortgage is increasing as well.
All this isn’t necessarily a bad thing. For some people credit is a boon. It helps them over illnesses and sudden emergencies, allows a student to finish his education, lets a tired housewife buy her washer earlier than otherwise.
You can even save money by borrowing it. Some women borrow money to buy fur coats. They nurse the cash—then watch for bargain sales.
Don’t Swim Near the Loan Shark
BUT easy payments can also mean 14-carat woe. Borrowing and installment buying are beset with perils for those who don’t know the facts about where to get a loan at least cost and risk.
Fortunately organized usury has almost vanished. Before 1940, illegal money lending flourished at huge rates of interest. Interest charges of 100% were common. (One man paid back a loan shark almost eight times the original amount he borrowed.) But the Canadian Small Loans Act of 1940 sets maximum rates for loans; it also requires moneylenders to be licensed by the Government (if they charge more than 12% a year) and submit detailed reports on their operations.
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But there still exist in most factories and many offices, pants-pocket lenders who collect 10 % a week for a loan. These part-timers do a considerable business at an interest rate that actually totes up to 520% a year.
Sometimes unofficial lenders get into higher-bracket loans too. A credit union in Hamilton, Ont., recently had to rescue a wage earner who had borrowed $500 from a local businessman and agreed to pay back $750 in monthly installments over a year. That was a true interest rate of 100%—illegal under the small-loan law. The unhappy borrower’s fellow employees advanced him the $500 at a charge of $30.
Four Ways to Borrow
Here are the chief legal sources for small loans and installment credit, and their true annual interest charges:
Commercial banks: Maximum effective legal rate, 12% a year. Prevailing rates charged by different banks, 6 to 12%.
Credit Unions: Maximum legal rate, 12% a yéar. Prevailing rates charged by different credit unions, 5 to 12%. Small-loan companies: Maximum
effective legal rate, 24% a year. Prevailing rates charged by different companies, 2; fo 24%.
Installment companies: No maximum legal rate except in Quebec. Prevailing rates range from 6 to 24% a year effective interest charge. Quebec maximum is 9% (M of 1 per cent a month).
It’s amazing how many families fall into paying higher interest charges than they need to. Many people don’t realize they can shop for the best rate on cash or installment credit, just as they shop for a used car. You can pay anywhere from $9 to $40 a year for the same $300 loan, and both rates are legal. Trouble is, most people just can’t figure out how much interest they’re being charged.
Another reason why many borrowers fail to take advantage of reasonably priced' loan sources is shame. The small-loan companies know that many people who could get money from their own credit unions come to them because they’re embarrassed to let friends know they’re in financial hot water.
Experienced loan-company men regard human beings as fairly evenly divided into two classes: the borrowers and the savers. Whichever you are, they believe, you’ll rarely change. Of course, at some moment you may be neither, but in the words of one wise old credit man, you don’t sit on the fence long. If you’re a borrower, “the first emergency or business opportunity, you’ll be on the borrowing side.”
Don’t think that only poor people borrow. Demand for cash loans is as great among middle-income people as among industrial workers in large towns. One large loan company finds more than half its clients sport white collars.
Why do people borrow? For more than any other single reason to pay other debts.
Obviously the cheapest solution for a family pressed by creditors is to arrange with each to make small but regular payments, meanwhile reducing I living expenses to the essentials until
the debts are paid off. Most creditors will accept such an arrangement as long as the debtor at least gets in touch with them if he must skip a payment. Sometimes a creditor is unwilling to wait; a doctor or merchant may suggest that a family borrow from a moneylender to pay his bill. But it saves you money to resist that suggestion if possible.
Borrowing for medical bills is a close runner-up to borrowing to consolidate other debts. Loans to buy furniture and clothing and repair homes are other leading reasons. People also frequently borrow to educate their children, and sometimes to marry them off. One woman has been coming to a Montreal bank for three summers for a loan to ship her daughter to a resort to meet new men.
The average person finds it hard to figure interest rates. A college professor in upper New York State not long ago posed this puzzler to a number of people:
Suppose you borrow $100 and pay back $9.17 a month for 12 months. What rate of interest are you paying?
The variety of the guesses was staggering. Some thought it was nine per cent, some 12, 10, 6. What’s your answer?
Actually, you would be paying a rate of about 20% a year. You pay back $110 for the $100 you got, but that doesn’t make the rate 10%. Because you are paying back a part of the loan every month, your average debt during the year is only about $50. The $10 interest charge is thus 20% of your average debt of about $50.
There’s something else you ought to understand. Suppose you’re told the interest rate is figured on “the outstanding balance.” For example, you are expected to pay interest of two per cent a month on what remains of your debt. That doesn’t mean the rate is two per cent a year. It’s 24%. Nor is it 48%, as you might assume from our first example, since in this case the interest is figured only on the remaining balance, not on the original sum.
These same two simple rules are useful when buying on installments too. Suppose you owe $100 on a sofa. The man says, “The credit charge is one per cent a month; that’s 12% a year on $100 so you owe me $112. You pay roe back $9.33 a month for 12 months, and we send you a full-color calendar for Christmas.” Then you should say, “That’s 24% interest. If it were only 12 I’d pay you back about $106, not $112. I’ll use last year’s calendar.”
If the period of repayment is less than a year, the number of dollars you pay ought to be correspondingly less. If the seller charged you $12 extra on a debt of $100 to be repaid in six monthly installments, you’d actually be paying an interest rate of 48% a
As already indicated, the main sources you can shop for a cash loan, in order of ascending cost, are commercial banks, credit unions and small-loan companies.
Bank Costs Differ
Commercial banks are not allowed to charge you more than six per cent a year, but different banks interpret this differently. Some figure it on the remaining balance; you’d pay them only about $3 for a loan of $100 to be repaid in 12 monthly installments, or, as the Bank of Montreal advertises, $100 costs you 27 cents a month.
But you’ll find other banks using the “discount” system. They charge you six per cent on the entire loan, even though you will repay monthly. So their six per cent rate on loans really comes to a true rate of about 12% a year, and a loan of $100 will cost you approximately $6 if repaid in 12 monthly installments.
Since 1944, when a House of Commons Committee urged them to make more personal loans, Canada’s banks have become increasingly interested in the possibilities of financing Mama’s new teeth as well as the nation’s new oil fields. But they must still be more cautious than lenders allowed to charge higher interest. Nor are the banks permitted to take a chattel mortgage on your belongings as security. They could take wage assignments, but usually don’t.
When the banks first got into the personal-loan business about 10 years ago, they generally required one or two guarantors. Nowadays, a leading bank recently reported, fully half its personal loans are granted just on borrowers’ own signatures.
What commercial bankers primarily scrutinize before okaying a loan is your “character.” That’s a definite but indefinable impression compounded of such ingredients as your general reputation, record of paying past debts, steadiness of employment, mode of living (do you stagger or walk home nights), how much debt you’re already carrying, and the purpose of the loan.
You can rely on a minimum of red tape in seeking a bank loan. Branch managers make 99% of such decisions on the spot. And you don’t have to have an account at a bank to borrow from it as many people still seem to think. If you’re turned down by one bank, try others before you resort to a more expensive place to borrow.
From 1945 to 1948, Canadian banks increased their personal loans 140%; a much greater expansion than that of the small-loan companies. More people are turning to commercial banks for cash to buy cars and household furnishings instead of buying them on the installment plan.
For a loan to enlarge your home, by all means go to the commercial banks. The Federal Government’s Central Mortgage and Housing Corp. has an arrangement with the banks to make such loans at comparatively low interest—not more than a true rate of five per cent.
The Credit Union Way
Besides commercial banks, there are also the trust companies. They have low rates on loans but generally require that you deposit security with them, 30 can’t be considered a source of loans for most people. They are, however, a source of mortgage loans, as are
'nsurance companies, but not banks.
Credit unions—co-operative banks -—are the next most economical place to borrow cash. Their rates are generally one per cent a month on the remaining balance, a true rate of 12% a year (although some of the credit unions have reduced their charges to as low as five per cent). If you borrow $100 from a credit union to be repaid over 12 months your cost would be about $6.
You have to be a member to borrow. But the way credit unions are breeding in Canada—faster than anywhere in the Western hemisphere including the U. S.—one out of every three or four families already belongs to one in their factory or office, church or fraternal society. Since 1941 their membership has increased 600% to a total of almost 900,000. People in rural areas, especially Saskatchewan, draw heavily on credit unions to finance farm equipment, and city people, especially in Quebec, use them to finance furniture, clothing and other large family costs. Actually, Canadians introduced credit unions to North America. A group of Canadiens at Levis, Quebec, started the whole thing in 1900 with the deposit of one dime.
In a credit union members pool their savings which—along with borrowings from banks—provide the capital for loans. The profits earned by loaning money to some members are divided among all members as interest on their deposits.
Small-loan companies and other licensed lenders charge higher rates but lend more freely. A little shopping around among the loan companies helps too. They’re not permitted to charge you more than two per cent a month on the outstanding balance, a true rate of 24% a year, including all fees. And don’t let lenders charge you extra sums as recording fees, late penalties, etc. It’s illegal.
That maximum charge for $100 paid back over 12 months comes to a little over $12. But some of the more competitive loan companies are charging l%% a month—21% a year, or a little over $10 for $100.
A bank frequently will be reluctant to give you a loan if your personal debts exceed 15% of your annual income, but a small-loan company may let you have money if your debts total as much as 25% of your income.
A loan company will generally ask you to sign a chattel mortgage, or else get someone to endorse your note. A chattel mortgage means the company can seize and sell your household goods if you don’t pay up. In actual practice, however, Household Finance Corp., the largest loan company, reports that in 17 years it never had to seize furniture or garnishee wages of a single Canadian family. The loan companies really consider a chattel mortgage more “a strong incentive to prompt payment” than very tangible security.
Most families could save additional sums—and Canadian industry would benefit too—if they would also do a little “rate-shopping” when they buy on installments. Except in Quebec, charges for installment credit are not regulated as are cash loans, and they vary from one half of ont per cent a month (a true yearly rate of six per cent), to two per cent a month (24% a year). Sometimes more, too.
But besides the size of the credit charge, you also have to compare the purchase price of the meichandise itself. A store may offer a low carrying charge, or even none, but may water the price tag correspondingly.
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Always see whether you can borrow from a bank and buy for cash for less than the installment seller who insists you must finance through him. A reliable seller doesn’t care who puts up the cash. Also, if your credit record is good, you can always get up to 90 days to pay for goods without any cost, through a charge account.
When you buy on installments, it’s smart to get an itemized breakdown of the separate costs of the merchandise and the credit charge, and any other costs—such as insurance on a car. Perturbed car buyers have recently been hollering to the various Better Business Bureaus that they have been charged excessive interest in buying used cars on deferred payments. In many instances, the sellers lumped all charges together, including the price of the car, the credit charge and cost of insurance. The buyers thus had no idea how much they actually paid for
Don Smith, manager of the Montreal Credit Bureau, points out that one of the fine things about the Quebec installment law, on which social welfare agencies and leading merchants collaborated, is that it limits a seller to repossessing only the item he sold you in case of default. Nor can he charge you extra penalties if you’re late in paying for the new bedroom set. And if he does take back the goods purchased, you still have 20 days to dig up the balance you owe and get it back. Furthermore, in Quebec you’re allowed to pay up your installments ahead of time if you can, and the seller must allow you a proportionate reduction in interest. Failure to make such refund is one of the most frequent dodges for charging the borrower more than he should pay.
Even in provinces where there is no legislative umbrella for the installment buyer, reputable stores will grant you all or most of these safeguards. But it’s notorious that many people don’t read installment contracts before they sign. They’re usually long, legalistic and the print is discouragingly small. But a reliable merchant will not discourage you from mulling over the contract all you want.
Probably the best system of all, of course, is to borrow from yourself. A family with the moral strength to build
its own loan fund will find it can save thousands of dollars in interest over the years. All you do is lend yourself the money: no charge; cordial service; complete privacy. You can pay yourself back in convenient installments.
I know a man who has his own savings but often borrows. “I need my backlog in case of emergency,” he explains. Well, a family will always have emergencies if it borrows instead of using its own cash, because part of its income is always being sluiced off by interest charges.
It’s also a temptation to borrow a little more than you urgently need. But folks who do that are likely to find it takes 18 months to pay off the $150 they borrowed while they could have paid off the $100 they actually needed in a year. Instead of paying $10 for the use of $100 for 12 months, they pay $22 for $150 for 18 months. Their interest cost has more than doubled, thanks to sheer extravagance.
You’ll always save, too, if you put down as much as you can on a purchase, instead of as little as the seller will permit. “No down payment” is no great favor. Nor are long terms. Interest charges pile up faster than most families realize. Even at the low NHA home mortgage rate of 4^% a year, it costs $10,600 to pay off a 25-year mortgage of $6,400. But if you cleared the $6,400 mortgage in 15 years, you’d pay back only $8,790.
In fact, Central Mortgage and Housing Corp. has warned that the postwar trend to smaller down payments on houses is loading families with king-size debt. CMHC’s present experience is that longer amortization has raised price tags on houses, so finally buyers have to put down as many dollars as before.
Many families lean heavily on credit, but dead beats are rare. One leading Canadian Bank reports its losses on personal loans in 1948 were just over one quarter of one per cent. Nor is that just because banks lend to the better risks. A loan company with many branches also says its clients may lag now and then but complete losses are few.
That’s a proud record. But you’ll ensure your family has an even better one, and a larger share of the abundant life, if you know how to keep your credit costs down. ★