Cost of consumer credit

When you borrow money to buy something, you are paying for the privilege of using somebody else’s money. A lender covers some of their costs by charging interest and administrative fees to arrange for a loan.

As a result of these interest charges and administrative fees, not all loans are equal. The law ensures that lenders disclose all borrowing costs and terms of lending to the consumer. This allows you to be able to compare loans.

Read the Business Practices and Consumer Protection Act Part 5.
Read the Disclosure of the Cost of Consumer Credit Regulation.

What is the cost of consumer credit?

The cost of consumer credit law can get confusing. Simply put, the total cost of credit is the difference between what the borrower receives when they borrow money to purchase an item (value received) and the amount they actually have to pay back (value given).

For example, if you borrowed $10,000 to buy a car from a credit grantor and you ended up paying back $12,500 ($2,000 interest and $500 service fees), then the total cost of credit would be $2,500. This is the true amount that you would pay to purchase the item on credit, rather then if you had paid cash.

Types of credit

There are different types of the cost of consumer credit:

Open credit: credit under an agreement if the credit agreement anticipates many advances of money to a consumer at the time the consumer requests it (such as a purchase on credit card). It has no limit to the amount that can be advanced over the period of the credit agreement although there can be a limit on the amount owing. For instance, you can’t borrow more if you owe a certain amount at one time, or exceed your credit card limit.

Fixed credit: credit under a credit agreement that is not for open credit. For example, you would pay a set amount in regular installments, perhaps for a car loan, or a mortgage.

Mortgage: a loan of money secured by an interest in real property, but does not include a prescribed loan. This would include any loan secured by real property, regardless of the item purchased.

Lease: any agreement for the hire of goods, except an agreement for the hire of goods in connection with a tenancy agreement. For example, the payments would be based on expected depreciation of an object, rather than the total value of the object.

What’s the difference between APR and AIR?

Annual interest rate (AIR) is the percentage of interest charged.

Annual percentage rate (APR) is the percentage of interest, plus any admin fees.

A key factor in comparing loans is the APR. Often when someone is considering a loan or a mortgage, they consider the AIR, but this is only part of the total cost you would pay for a loan. it is important to look at the APR, which will give you a full understanding of how much the loan will actually cost you.

For example, if you buy a car for $10,000 and pay 5% annual interest and no additional costs, your AIR would be 5%

However, if you buy a car for $10,000 and pay 5% annual interest plus $500 admin fees, your APR would be 6.25% because it includes the annual interest and the admin fee.

What must be included in ads when it comes to the cost of credit?

Advertisements for purchases on fixed credit, such as a car, must display both the amount the car would cost if you paid for it upfront (cash price) and how much it would cost you if you purchased it on credit (APR).

Advertisements for open credit, such as a credit card, would need to include the annual interest rate and non-interest finance charges. In this case, the APR cannot always be included because the amount owing on the credit card can fluctuate.

Advertisements for a lease, such as leasing a car, would need to include wording that the transaction is indeed a lease, the term of the lease, the amount of any payments that are payable before the beginning of the term, the amount, timing and number of payments, the APR and any extra charges based on the usage of the leased goods.

Advertisements for ‘no interest payments’ must clearly state if it actually is interest free, or if it is an interest free grace period.

Your rights as a borrower

As a borrower you do have rights, here are some:

If you enter into a credit agreement you must receive a written disclosure agreement, containing the required information in an easy to understand format. You must receive this agreement at the earlier of entering into the agreement or making any payments.
If you enter into a floating rate loan you must be provided with an annual statement with certain details.
You have the right to choose your insurer
You have the right to cancel optional services, such as extended warranties or optional insurance within 30 days and get a pro-rated refund
You have the right to pay off the full outstanding amount without a penalty (except if you took out a mortgage loan)
If you are allowed to defer a payment you must be told whether or not interest will accrue on the unpaid amount during the period in which the payment was deferred

What do you owe for charges on a lost or stolen credit card?

If your credit card is lost or stolen, report it to the credit card company right away. Call them and then follow up in writing to have proof that it was sent.

Once you have reported your credit card lost or stolen, you are not responsible for any debt incurred going forward.

You are also only responsible for a maximum of $50 or the maximum amount set by the credit agreement (whichever is less), prior to reporting the card lost or stolen unless your personal identification number (PIN) was used at an automated teller machine (ATM).

Read our consumer tips on cost of consumer credit.

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