If your financial life is going well, you’ve probably never used a Buy Now Pay Later (BNPL) app and may not have ever heard of them.  Here I look at what return they make on their money, and who pays them this return. For a good explanation of BNPL apps, see Preet Banerjee’s video where he covers what they are and why you should avoid them.  In a typical case, if you are online buying a $100 item, you might encounter an offer to pay $25 now, and then $25 more in 2, 4, and 6 weeks.  From your point of view, this looks like an interest-free loan, but the BNPL company might only pay the retailer $94.  So, the BNPL company makes $6 over 6 weeks. BNPL Returns For this example, Preet calculates the BNPL company’s return as $6 on $94 invested over 6 weeks (42 days).  This works out to an annual uncompounded rate of (6/94)*(365/42) = 55%. However, the BNPL company didn’t wait 6 weeks for the whole $100.  In fact, it got $25 of this money right away.  So, we c...

I recently saw the headline Five warning signs you are in over your head financially , by Pattie Lovett-Reid.  I saw it as an opportunity to learn more about how to help people avoid financial trouble. Here is a summary of her list of warning signs: You are ignoring your finances. Your finances are giving you a lot of anxiety. As soon as you get paid, all of your money is spoken for, with the majority of it going to debt service. Your creditors are calling non-stop. You are borrowing from Peter to pay Paul. I was expecting warning signs that you’re headed in a bad direction, but these seem to be signs that you’re already in serious trouble that will be difficult to fix.  In a similar vein, here are my warning signs that you’ve got health problems. Most of your blood is on the ground. You haven’t breathed in a few days. You’ve been cremated. My point is that I was hoping for more subtle signs that your finances are heading in the wrong direction.  Catching the problem earl...

Through a combination of good luck and good habits, I’ve never had a problem staying out of debt. I’ve had to work at understanding what causes others to have debt problems. This is where Shannon Lee Simmons’ book Living Debt-Free has helped me. She lays out a wide range of debt management plans that take into account human nature and the underlying reasons why people have trouble with debt. The book contains a great many stories of people Simmons helped out of debt. These stories illustrate her points well and made the book an entertaining read. Without thinking too deeply, we might believe that making someone feel shame about being in debt would drive them to cut their spending and pay off their debts. Simmons says the opposite is true. People need to feel good about some of the choices they’ve made to generate the sustained enthusiasm necessary to spend a few years digging out of debt. “The stronger the negative emotions connected to your debt, the more likely you are t...

In Warren Buffett’s latest letter to shareholders , he comments on companies using debt, but his ideas carry over to personal finance as well. We use debt sparingly. Many managers, it should be noted, will disagree with this policy, arguing that significant debt juices the returns for equity owners. And these more venturesome CEOs will be right most of the time. At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal. A Russian-roulette equation – usually win, occasionally die – may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire. Rational people don’t risk what they have and need for what they don’t have and don’t need. When times are good, it’s easy to make the payments on your debt; potential problems seem distant and harmless. But times can turn bad suddenly. Nearly 20 years ago, many Nortel employees with fat salaries found...

Does a 0% interest loan sound too good to be true? You can get a 12-24 month installment loan from Brim Financial, and they claim to charge 0% interest. Not many borrowers will truly believe the cost is zero, but few will guess how expensive these loans really are. Brim replaces “interest” with “fees”. There is a one-time installment fee of 7% of the loan amount that you have to pay in the first month. Then there is a 0.475% monthly processing fee. This fee is based on the original loan amount, not the declining balance owed. Suppose you borrow $1200 for 12 months. The monthly payments before fees are $100. In the first moth, you pay the 7% installment fee ($84 in this example). You also pay a monthly processing fee of $5.70. In total, you pay $189.70 in the first month, and $105.70 for the remaining 11 months. The internal rate of return works out to 2.00% per month, and this compounds to $26.9% per year. So, these carefully crafted loan terms combine 0% interest with ...

Debt is a big part of modern life. The high cost of university leads to student debt, and sky-high real estate has many Canadians in large mortgages. And that’s just the kinds of debt that most easily justified. Then we have the growing lines of credit and credit card balances that come from failing to save up for the cars, clothes, electronics, restaurant meals, and home upgrades we want. Finance Blog Zone asked bloggers for their takes on how to manage debt. (Web crawlers think this article's address is broken but it seems to work: https://www.financeblogzone.com/advice-for-managing-debt/).  I read through them all and found 7 of them that caught my eye either because I found the ideas interesting or because I disagreed. Here’s my take on their takes. Brave New Life Brave New Life says “College debt and a home mortgage are the only two acceptable debts. Ever.” And for emphasis: “No debt for cars.” There may be narrow circumstances when other forms of debt make sense,...

Lenders offering installment loans keep popping up. Most of them charge sky-high interest rates mainly suitable for people who don’t really understand interest. I recently saw a Money Mart ad for loans of 1-5 years with text “The APR for the loans is 59.90%” buried in the fine print. They aren’t the only ones charging this rate. Anything above 60% per year is considered “interest at a criminal rate” in the criminal code. So, these lenders are staying well clear by maintaining a buffer of 0.1%. This is how I imagine the discussion going when these lenders chose their interest rate. “Is 60% criminal, or is it only over 60% that’s a problem?” “Not sure. Maybe we should back off to 59% just to be safe.” “Are you crazy? We can’t leave that much money on the table. Let’s go with 59.99%.” “Is that getting too close? Maybe just 59.9%.” It could be that this big decision over how much interest to squeeze from their customers was more sophisticated than this. Maybe just ...

We can try to justify taking on a huge mortgage by doing detailed projections of house price increases and accounting for various housing costs, but this isn’t the path to a useful answer. It’s unexpected factors that drive this decision. One factor that many don’t properly take into account is repair costs. We all know the furnace, roof, and other expensive items will need replacing, but we usually can’t predict when. This makes it easy to ignore such infrequent large costs in a budget. Some inexperienced homeowners may even forget about predictable costs like property taxes, house insurance, and condo fees. Another category of unexpected factors is reduced income. If you buy a house with a spouse right up to your joint affordability limit, any reduction in income can be devastating. We’ve all been told that we could lose our jobs, but in my experience, most people don’t think this will happen to them, even though it’s common. You may believe you could lose your job, but th...

Robert Brown has some ideas for how banks can help students learn to handle their credit cards without growing debt and paying interest. To deflect some obvious criticism, he concludes with “I honestly do feel that the big banks and other credit card providers are missing an opportunity to attract new customers – potentially very loyal customers for life – by treating them better while they are students. They will have plenty of time to profit from them once they have graduated.” Let’s start with a minor problem. Brown thinks he knows how banks should run their business better than they do. This is ridiculous. If his simple ideas for encouraging students to avoid debt and interest were profitable, the banks would already be using them. The truth is that hooking students on credit cards is profitable on multiple levels. For one, students rarely default because their parents usually pay if necessary. For another, setting a pattern of high-interest debt makes people more profitab...

Professor of economics at Carleton University, Frances Wooley, says that “ Financial literacy education is mostly ineffectual debt-shaming .” Her article makes a number of excellent points, but contains a dose of pandering as well. Most of what passes for financial literacy education doesn’t help people get out of debt. True enough. The forces that drive us to spend money are complex, just as the forces that drive us to gain weight are complex. Just telling a person to spend less rarely helps. Most people with too much debt already know their spending is a problem, so telling them again has minimal effect. There are possible exceptions with naive young people who haven’t yet maxed out their first credit cards, but just telling them to stop spending so much isn’t likely to help much either. Businesses do what they can to exploit our weaknesses and make it very easy to spend money with the tap of a credit card. Governments can certainly do more to help simplify people’s finan...

The first time I got a mortgage, the feeling of being in debt occupied my mind and kept me off balance for quite a while. I felt I should cut back on spending as a response to this feeling of financial “emergency.” Eventually, I got used to it, as do others. The trouble comes when you get used to more serious debt problems. When discussing credit cards, I usually tell people that having a balance on credit cards you can’t pay off each month is a hair-on-fire emergency that should trigger immediate cuts to discretionary spending. No more eating out, movies, or other unnecessary spending until the credit cards are paid off. However, it’s not possible to stay in a panic state for a long time. It’s very easy to get used to being in debt. Many people who lose their jobs or have some other financial calamities find themselves not only with credit card debt, but also in debt to hydro, the gas company, the phone company, and many other creditors. As they dig themselves out of debt,...

Decades ago, it was common for people used to say “I can’t afford it” when discussions came to big things like houses or cars and even for small things like going out to dinner. However, as Mark at My Own Advisor observed, we don’t often say we can’t afford things any more . I think the culprit is easy access to debt. When people used to say they couldn’t afford things, what they meant was that they didn’t have enough cash in their wallets or bank accounts right now. However, today’s salespeople are well-trained on how to get past this objection by steering you towards debt. Try telling a car salesperson you can’t afford a certain car. He’ll scramble to work out lease details to get the payments down to an amount you can afford. You’ll end up with a debt and a stream of payments you don’t want. Even a dinner out may go on your credit card and become debt if you can’t pay it off at the end of the month. The next time someone is trying get you to spend money you don’t want to...

As the saying goes, there are more opinions about debt than there are people. Here’s short quiz to test how much you know about debt. 1. A few years ago, newlyweds Emma and Liam decided to buy a house. Their combined income was $100,000 and the bank said they qualified for a $450,000 mortgage. They borrowed $50,000 from their parents as a down payment and were the proud owners of a $500,000 house. The mortgage payments were a stretch, and all the house costs they didn’t know about in advance added to the financial pressure. Even before Liam lost his job, they were starting to run up their credit cards. By the time Liam found new work at lower pay, their high-interest debt was spiraling out of control. They held on for a while, but eventually declared bankruptcy and lost the house. Where did Emma and Liam go wrong? a) Emma married a loser. b) Their cheap parents should have given them a larger down payment. c) They did nothing wrong. Mortgages are good debt and they were...

Here is a lightly edited question from a reader who calls himself or herself “Debt Free”: I've read over a bit of your blog, and I enjoyed it. I'm on a mission to pay off HUGE debt. I need some help (support – not asking for money). I need to be accountable to someone for my daily spending to keep me on track so to speak. This is my situation: Credit card #1 Balance $6500, Int. Rate 19.99% Credit card #2 Balance $11,800, Int. Rate 19.99% Credit card #3 Balance $3600, Int. Rate 28.99% Credit Line Balance $14,000, Int. Rate prime plus 5% (currently 8%) Car Loan balance $17,000, $177 biweekly Mortgage balance $114,000, $163.08 weekly Child support $500 per month (this is likely to change end of this year) Income: Full time job $2926 (net) per month Part time job $1700 (net) per month Do you have any suggestions? I would like to have this paid off in 2.5 years from now. Any advice you can pass on would be greatly appreciated. Thanks! Debt Fee, I’m glad yo...

Stingy Investor pointed to a set of slides from Fairfax Financial Holdings that began with the quote “We expect to compound our book value per share over the long term by 15% annually.” Averaging a 15% per year return on a stock sounds great right now, but not too long ago it would have seemed very low. Back in the late 1990s as tech stocks boomed, expectation for stock returns were well above 15% per year. These expectations turned out to be hopelessly unrealistic, but back then many investors wouldn’t have given Fairfax a second look if the company was only shooting for 15% per year. I find this a useful reminder of how the world and people’s expectations can change drastically. It’s hard to even imagine a world with double-digit interest rates, but they could easily come back again. It’s dangerous to make your plans expecting today’s conditions to persist indefinitely into the future. Every time I’m tempted to mortgage my house for half a million dollars and invest the pr...

There is no shortage of debate over whether certain debts are good or bad or whether there is even such a thing as good debt. Million Dollar Journey says that good debts exist , and Big Cajun Man comes down on the all-debt-is-bad side . I think a large component of the disagreement is semantic. Debt comes paired with something positive. Borrowing to go to school gives you an education and a debt. The education part is good and the debt part is bad. When people say that this is a good debt, they mean that you’re better off with both the education and the debt than you are with neither. But by itself the debt is still bad. So am I just playing semantic games? I don’t think so. By getting the semantics right, we can change behaviour in a positive way. We should say that debt is bad, education is good, and that (most of the time) the advantage of education outweighs the disadvantage of having student loans. Phrased this way, it’s clear that minimizing the debt is desirable. ...

Much has been made of the fact that the family debt-to-income ratio has hit 164.6% . In a funny off-colour joke, Preet Banerjee made the point that this is an average and that young people tend to have a higher debt-to-income ratio than older people . Boomer and Echo made a similar point that young people tend to have large mortgages and that their debt-to-income ratio is misleading . I think there is truth in these arguments, but that young people need to be very careful using these arguments to justify taking on enormous debts. An important goal is to eliminate debt before retirement. Not everyone will succeed, but we can expect the debt-to-income ratio for retirees to be low. Young people buying a house tend to start with large mortgages and smaller incomes than they will have later in life. It’s normal to expect that debt-to-income ratios will be higher among the young than the old. So, young people whose ratio is higher than the national average can relax. But don’t rel...

I’ve never really set financial goals for myself, but I do find the goals others set for themselves interesting. I used to make projections about future savings based on my income and spending to see when I’d have enough money for a house down payment or a car, but this is different from setting goals. One thing that is usually missing from people’s financial goals is a goal related to overall debt. My day job is related to online security. I spend a lot of my time looking for ways to get around security systems so that we can make them better. So, when I look at someone’s financial goals, I immediately look for easy ways to achieve the letter of the goals without meeting the true spirit of the goals. Once we see the problems, it’s possible to make the goals more robust. Krystal Yee at the blog Give Me Back My Five Bucks posted her 5 financial goals for 2013 . Her first goal to “earn $85,000 to $90,000” isn’t easily gamed. The fourth goal to “diversify my investments” away f...

Your Total Debt Service Ratio (TDSR) is the percentage of your gross income that covers your basic housing costs (including mortgage) plus payments on consumer debts. Most lenders prefer this to be below about 40% of your income. But does it make sense for this to be based on your gross income? After all, your tax rate increases as your income increases. To illustrate what I mean, I calculated the percentage of gross income left over after taxes and 40% TDSR for various incomes. I assumed just the basic personal amounts for tax deductions for an Ontario resident. Here are the results: At a $20,000 income, you’re left with about 50%, but for a $150,000 income, you’re left with only 27%. On the surface, this doesn’t seem to make sense. Shouldn’t the TDSR take into account tax levels so that the maximum TDSR permitted is lower at higher incomes? To investigate this further, I produced a second chart that shows how many dollars are left rather than the percentage: This...

David Trahair’s book Crushing Debt is subtitled Why Canadians Should Drop Everything and Pay Off Debt . This led me to believe that the primary focus of the book would be the need for individuals to reduce their debts. However, to get to discussions of personal finance and debt reduction, readers have to wade through the first half of the book which is about macroeconomic factors related to debt. The book has some interesting parts, but overall it is a little thin on useful content. “A financially illiterate, disorganized client is a bank’s most profitable customer.” The thought of giving my money away to a bank is a great motivator to get me organized and seeking financial knowledge. Trahair even claims that he once arranged to give a series of free lectures at a university, but the university’s “Financial Partner” put a stop to his lectures because “it would be bad for their business.” “Household debt levels are threatening the stability of Canadian banks.” The McKinsey Gl...