Last Updated: February 6, 2009
The current economic climate has left many consumers in a very difficult situation as they try to determine the best course of action for their financial stability. Whether consumers are looking to address existing debt issues or possibly take on further debt, there is some basic information about interest that every consumer should understand.
When items are purchased on a credit card or through a loan, the businesses and banks that lend credit or money usually require that the consumer pay back the money “with interest” through monthly payments. Interest that is added to, or builds up on money you owe is called a credit charge. This means that, in addition to paying back the amount you borrowed, each monthly payment will include an interest portion. The interest rate is a percentage of the amount owing. If a payment is missed you may be charged interest on the amount owing, including any portion attributable to past interest. This is sometimes called interest on interest.
It is important for people to know just how much extra it will cost them to pay later for goods they receive now or to borrow money. People may want to shop around for the best deals or reconsider a loan or purchase if the cost is too high. So how do you find out about credit charges? The law in Saskatchewan requires creditors to disclose certain information when they advertise credit arrangements. If the credit being offered is for a loan of a sum of money or for the purchase of goods, the ad must disclose both the interest rate and the total cost of borrowing the money. Consumers should be aware however that ads where space or time is limited, for example radio, television or billboard ads, are not required to disclose the total cost of the credit. Advertisements for things like lines of credit, where the total amount borrowed and the interest rate may change over time, must tell consumers what the starting interest rate is and any other finance charges.
Creditors must also provide you with additional information when you enter into a credit agreement. Depending on the type of credit agreement, you must be informed of a number of things including the interest rate, the circumstances where interest will be added to principal, how your payments will be divided between principal and interest and the total cost of the credit including any default charges.
Borrowing money or receiving goods on credit almost always results in the borrower paying interest or credit charges. However, it is common to see offers to “pay no interest” until a certain date. Saskatchewan law requires creditors who make “interest free” offers to tell consumers about any strings that may be attached to the offer. For example, an ad that entices people to buy furniture with “no money down and no payments or interest” until a year later must also disclose whether interest still builds up during this period, if there are any conditions attached to the offer, what those conditions are and the amount of interest that would have to be paid if the conditions are not met. If the ad does not disclose the information required by law it will be assumed that unconditional interest-free credit is being offered. Similarly if a creditor offers to allow you to miss a payment and make it up later the creditor must tell you if you will be paying interest on the missed payment.
But how much interest may a creditor charge? Under the federal Interest Act a person may agree to any rate of interest that they feel is reasonable. However, this may be restricted by other federal legislation. For example, the Criminal Code says that the maximum amount of annual interest allowed by law is 60%. Charging an annual interest rate that exceeds 60% is a criminal offence and could result in up to five years in jail.
The Interest Act also specifies that where interest is payable under an agreement but the actual interest rate is not provided, the interest rate will be five percent per year. Both federal and provincial laws offer protection from questionable creditors who are in a position to take advantage of individuals.
Another way Saskatchewan people are protected from excessively high interest rates is The Consumer Protection Act. The Act prohibits unfair business practices that have a goal of taking advantage of a consumer. Retail businesses cannot include terms or conditions within an agreement that are harsh, oppressive or excessively one-sided. This means that a creditor cannot include an excessively high interest rate because it would place a difficult responsibility on the consumer and make the terms of the agreement too one-sided. The Act also does not allow a business to sell goods at a price that grossly exceeds the price that a consumer might pay for the goods elsewhere. If the interest rate is unreasonably high then this provision of the Act could be violated.
Whatever the interest rate, the faster you pay off the debt the less interest you will pay. Under Saskatchewan law, except for mortgages, you are entitled to pay off the full amount of the loan at anytime without prepayment charges or penalties. You are also entitled to pay more than is due on any payment date. If you pay the full amount owing you are entitled to a refund of a portion of any finance charges you paid for the loan.
All too often people ignore provisions in lending agreements that deal with interest charges. Individuals must protect themselves by knowing their rights. Read your lending agreement carefully to ensure that the annual interest is written into it, that the agreement is reasonable and that the total price, with interest and charges, is included. This should allow you to know exactly what you are spending and avoid unpleasant surprises in the future.ISBN/ISSN number: 1918-1728