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Interest, Insurance & Optional Services

If you are considering borrowing money or purchasing something on credit, it is important to understand that there are additional charges added to the initial charge. Some of these are optional, but some are not.

Paying Interest

Businesses and banks that extend credit or lend money usually require that the person pay back the money "with interest" through monthly payments. This means that, in addition to paying back the amount you borrowed, each monthly payment will include a borrowing charge called "interest." 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 past interest. This is sometimes called interest on interest.

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 any time 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.

Interest Rate Disclosure

All too often people ignore provisions in lending agreements that deal with interest charges. It is important for people to know just how much extra it will cost them to pay later for goods 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.

Q

How do I find out what it will cost to buy on credit or borrow money?

A

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 can 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 (i.e. the difference between the value of what you will receive and the total amount you will pay the lender).

No Interest Offers

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 but does not have to be paid, if there are any conditions attached to the offer, what those conditions are and the amount of interest that must 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 whether you will be paying interest on the missed payment.

Limits on Interest Rates

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 and Business Practices 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. Unreasonably high interest rates could violate this provision of the Act.

Insurance and Optional Services

Sometimes creditors require you to purchase insurance on a loan. Creditors may themselves sell this type of insurance. However, under Saskatchewan law you can purchase loan insurance from another company. You may want to do this if you are able to get a better price elsewhere. The creditor has the right to not agree to a different insurer, but only if there are reasonable grounds.

When you enter into a credit arrangement you may agree to buy other optional services. For example, you may buy a vacuum on credit and also agree to purchase repair and maintenance services. If you later decide you do not want these services you can cancel with 30 days' notice.

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