In financial circles, “debt is bad and savings is good” is a common refrain. But the truth is somewhat more complicated and not enough people are educating themselves about how to properly use loans and other credit products to their advantage. Vlad Sherbatov is the president and founder of Smarter Loans, Canada’s largest loan and financial directory. He’s also the host of, The Smarter Money Show, the video podcast that helps people excel with money in life and in business. He is a passionate entrepreneur and business leader in the Canadian financial sector and was elected as one of 2019’s top 25 lenders in lending by the Canadian Lenders Association. Vlad joins me on the show this week to explain how the right credit products can help propel you forward. 

 

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Do you know that 57 percent of Canadian adults don’t have a will? Willful has made it more affordable, convenient and easy for Canadians to create a legal will and power of attorney documents online from the comfort of home. In less than 20 minutes, and for a fraction of the price of visiting a lawyer, you can gain peace of mind knowing you have a plan in place to protect your children, pets and loved ones in the event of an emergency. Get started for free at maplemoney.com/willful and use promo code Maple Money to save 15 percent. Now, let’s chat with Vlad… 

 

Tom: Hi, Vlad. Welcome to the Maple Money Show. 

 

Vlad: Tom, it’s a great pleasure to be here. I’m a big fan of your show and the blog. Thank you for having me on. 

 

Tom: Thanks for being on. I wanted to have you on because it’s a topic we haven’t gone into too much on the podcast which is loans and borrowing. Certain ones get a bad reputation, but I think they all have a place if used correctly. Take credit cards, for example. For me, I hear it all the time. There’s a lot of people that are anti-credit card. I just consider it a tool and I like the quote; I’ll butcher slightly, but it’s a tool no different than a saw. You can do something productive with it or you can hurt yourself if you’re not careful.

 

Vlad: You could cut off your foot. 

 

Tom: Yeah. I like the analogy there though. It can be risky if you’re not being responsible, but it can serve a lot of purposes. You can do a lot of things with different types of borrowing products. 

 

Vlad: You can mess something up if you approach it irresponsibly. And that applies to almost anything in life. I think that is an interesting subject. You can’t really be anti or pro. Debt is debt and credit is credit. In some ways we’ve been programed to think of debt as this bad thing. But debt is not bad. In fact, credit—and notice how credit sounds even a little bit different than debt. Credit itself is actually a great privilege to have. There are a lot of people in Canada that don’t have access to credit. They are, in fact, credit invisibles. That’s a term, it’s a real thing. People that do have access to credit, who have the ability to get a credit card at a bank for financing to purchase a vehicle or get a mortgage, those are all tremendous privileges that we have as consumers to be in a position to do those things. Because, like you said, it’s a tool that, when used effectively can propel us forward. But when it’s mismanaged it will get you into trouble, right? So debt is not bad. Debt is actually very good. But mismanaged debt can be catastrophic. Debt that is entered into for the wrong reasons will have very long-term, financial implications that will be negative and hard to climb out of. So responsibility here is a great factor because everybody kind of yells at us from the side, saying you have to get out of debt. Debt is really bad. Debt is bad and saving is good. And debt, I think, simplifies for us how to think about finance in a lot of ways. It can almost be a lazy way out to say, “Well, that’s all I really need to know.” But what if you go a little deeper? What if you educate yourself about how credit actually works and how wealthy people, organizations and businesses leverage debt to actually propel themselves forward? How can they get a little bit of debt, behave responsibly to achieve goals, to get access to more and more and more and build wealth? That is how wealth is built. For people that are able to take on that challenge and challenge themselves to maybe do some reading, do some self-educating about the subject of credit, they won’t be intimidated by it anymore. And in fact, they will look for ways to use it to their advantage. 

 

Tom: You mentioned leverage. That’s another one that some people look at as leverage equals risk. But to me, I completely see leverage as a tool. If you want to invest in real estate as a as a landlord or something like that, one to two of your dollars can have $10 of spending power. That’s something that can get you ahead a lot quicker than trying to save up for 100 percent of an investment, then go do it. Even with your own personal house. Obviously, a mortgage helps you get in there a lot sooner than saving up for 20 years and then deciding you’re ready for a house. 

 

Vlad: Exactly right. People that are executing the types of strategies that you’ve just described have a very deep understanding of how the financial markets work, how the math around these investments work so that they can make a calculated decision in their credit access. And when they use credit and they take on these big loans from a bank to perhaps invest in real estate, they have a very solid plan that is well thought through so they can make that decision with confidence as opposed to falling flat on their face and take it out for their own reason. 

 

Tom: Another example I can think of is, if you were to invest in stocks. Maybe they’re dividend paying stocks that can basically pay off the interest. That goes a long way. But I’ve heard from people that say, “What if the interest rates go up? How is that going to affect me?” Ultimately, you won’t want to get caught in a down market. It’s fair, but that aside, assuming regular growth, you can always sell that investment at any time and pay off the loan. Again, if you have the worst luck possible, maybe it’s not a great time to sell. But it’s something where, if you stay on top of these things and know your dividend or at least that perceived gain in a stock or ETF is outpacing the interest, then you are ahead. It’s not even about some future value. You can actually grow more than the cost of these different borrowing options. 

 

Vlad: And I suppose people do utilize that strategy. I think when it comes to making decisions around investing or potentially considering taking on credit in order to make investments, those have to be approached with extreme care. Those are the ones that people have to either be really well, self-educated or have a strong financial adviser team on their side. I’m certainly not in the position to have those types of conversations with anyone because, here’s the thing… people leverage debt to get ahead and make investments. And perhaps they have a sophisticated stock portfolio. But to a large population of people, they have a totally different perception of debt and their reality is actually very different. They may have already made some mistakes in the past. They may be in a position where they are just trying to get their bills paid on time, and that would be already a good achievement for them. To them, the idea of debt can be a very scary thing that’s a spiral. And maybe some people are already kind of going down that spiral and it can be hard to climb out of it. For example, you look at somebody who is a newcomer to Canada. They may not have a great deal of credit history so now, even if they are able to access credit, they are forced to pay extra for that. Their interest rates will be a little bit higher because they don’t have a strong financial standing in the record books. And as they move on in that journey, somebody gets a full-time job, somebody has more income, they can get a mortgage, they can get a car, they now have a credit history. You have a very wide range of financial situations on the spectrum and financial profiles. There are different debt products and solutions for different people along that spectrum. Part of the mission for our company, Smarter Loans, is to help people navigate that water because it can be a very intimidating and sophisticating place. When you don’t have the necessary information, then you’re susceptible to making decisions that don’t necessarily work out the best way for you in the long-term. Or they’re not the most optimal decisions for you. What we always encourage people to do is to try to educate themselves about how that entire ecosystem works so they’re able to spot themselves, understand who they are and what kind of products and services are best suitable for them in their situation. 

 

Tom: You mentioned that someone coming to Canada for the first time, they’re new to Canada, what steps should they take to start building credit? It’s something I don’t think of much in my own little bubble because I’m used to the regular process where you maybe get a credit card in college and start building your credit from there. But if you’re someone coming in (to Canada) as an older adult, just to be dropped into a different country and have to deal with what seems like almost starting over, how does that work? Do they get any credit for the different borrowing options they used in other countries? Or is it really a fresh start when you enter Canada? 

 

Vlad: It is a fresh start because you’re dealing with a different financial ecosystem. The only thing you can bring over with you that will help is cash and assets. If you have some of that, it will help you. The only way to really access more credit right now in Canada is to have an ongoing track record of successful treatment of credit which means you start with that $500 credit card from college. Eventually, your bank will give you $1,000, then 5K, 10K, 50K, and so on and so forth. Eventually, you can get a mortgage for $1 million. You’ll grow and grow but you need to get started somewhere. So if you are a newcomer, you do have options. You’re not completely on your own. First of all, companies will give you access to credit but they will consider you to be slightly riskier. You have a couple of options. You can pay a little bit extra because you don’t have as much of a credit history. You’ll just pay extra for a limited time until you build up that history and then you decrease the interest rate. You could use some of your assets. Maybe you’ve moved here with a nest egg that you’ve used to purchase a home. Maybe you have a vehicle. A lot of lenders will use collateral as security and give you a credit that way. Or you can even use your savings to get a secured credit card. You put your own money in and you’ll get a credit card where activity will still be reported to the credit bureaus. So you’re building credit history without actually really borrowing money from someone. There are several options for you. And this is just a very good example, actually—even just as a newcomer, you have a variety of tools that can get you one step higher and one step further, in terms of your next move in your growth and building a family. That way you can buy a car, you can buy a home, you can buy additional things and grow as a family and invest. But you have to start somewhere. There’s lots of options pretty much for everybody right now, no matter where you are on that spectrum. 

 

Tom: It sounds like this is something I’m guilty of, too. It’s probably worth sort of playing this credit score game. The reason I say I’m guilty of it is because I’ve probably taken it too far in so much as, is it a level of excellence or is it just about not having a poor credit score? 

 

Vlad: Well, it all matters. And the truth is, now it’s not just the credit score because companies that give loans have become much more sophisticated over the past five, 10 years with technology. And what that means is they have the ability to look much deeper than just into our credit scores. For example, they will look at our activity in the bank, our actual spending habits and spending trends. They will be able to very clearly see our income. It’s not about bringing in two paystubs anymore. The level and depth of actual information is much deeper now. It allows lending companies, whether it’s a bank, fintech lender or a credit union, to make decisions in a more sophisticated way. So the credit score, as a factor, has actually been decreasing. It’s still one of the main factors by far, but it’s not the only factor. As companies become more sophisticated with tech, they are getting much better analyzing us as consumers to say, “Yes, you’re approved for a loan,” versus not being approved. This is a good thing, because when people rely too much on just a credit score, you’re excluding a tremendous amount of population like I just described. You can be a newcomer, a very young person. You can be in a lower income household that hasn’t been using banking products your whole life. It puts you at a great disadvantage. So having more tech infused in the borrowing experience will help more people take advantage of these products. 

 

Tom: I like that because you can have a really good credit score and be paying off that credit card but if you’re paying off the credit card with your credit line, you’re still going into the cycle of building up debt. You could have a decent credit score because you still have enough available credit there to be able to see this down to the transaction level. They can look for things like what your debt level is. And your spending habits are interesting too, because I assume that means that they can basically look to see if someone is a bit of a shopaholic and spending every dollar they have. There are signs there that could be a potential problem. 

 

Vlad: Well, the practical use of it would typically be in the other way around where they would be looking at somebody who, perhaps, has a very low credit score. They’re able to analyze them very closely and see their low credit score is because of mistakes they made six years ago and because they moved to the country four years ago. But they’re actually making $3,500 dollars a month and usually have at least $800 of it left over as disposable income at the end of the month. They never had an insufficient bank charge or overdraft protection. I think they’re a very high quality prospect as a borrower so we’re going to lend the money anyway. What you described could happen and there are absolutely cases where people’s ability to repay a loan is actually not as high as their credit score might suggest. That absolutely can happen. Lenders are able to apply it to both cases. But I love the fact that it gives more people from the other side to now have a more of a fair shot to repair their credit history and come back to a level where they’re able to access the same credit products as somebody who has a great credit score because there’s a very significant benefit to it. It’s not just that you have access or you don’t. That access becomes more or less expensive. Your interest rates will be higher or lower. Your terms will be different. So from a financial health point of view, credit score is still a great indicator. From a financial literacy point and how we approach our money and our ability to make decisions that are actually in our long-term favor, it’s a whole separate subject and I don’t think it has any correlation to your credit score whatsoever. 

 

Tom: Yeah, I could see situations where someone could have a perfect credit score but if they’re living the so-called ‘paycheck-to-paycheck’ they’re on that one dollar line between no longer being able to pay off all their debts on a monthly basis. So it makes sense that there’s more than just the credit score. 

 

Vlad: Well, look, it’s not about how much you make, right? It’s about how much you get to keep and what you do with that money. We had a guest on show, Ron Shevlin, who is a global influencer in FinTech. He’s been consulting with banks for the past 25 years for their strategies. I’ll quote him, “People assume that if somebody who makes $100,000 a year has better financial health than somebody who makes $50,000 a year,” and that’s just completely not true exactly for that reason. 

 

Tom: Yeah, I’ve seen that personally. I used to know a bunch of real estate agents who would have this high income. Granted, a bit irregular, but they were having trouble paying their bills. They’d be in the office saying, “I’ve got to get this payment right away so that I can pay off this bill,” and hearing this, I was thinking, how do you not do this? It was when I was very much a young adult and the idea of knowing how much money they made, that they’re still complaining they can’t pay their bills. That kind of shocked me. 

 

Vlad: Well, that’s really the way it goes. Our lifestyles change to fit the new income level very quickly and we adapt up and down. I went through the same thing. We started the business in 2016 but leading up to it I had a lot of regular jobs in the financial sector and the marketing field as well. I did spend close to 10 years of that progression ever since starting off as a teenager. My first job was $28,000 a year job. Then it went to $33,000 and then $40,000. Eventually, I made my way much higher than that. But once I got past the point of being able to pay all my bills, it didn’t really add significantly and yet I continued to kind of have that same paycheck-to-paycheck lifestyle. And what happened to me is, when I did start the business in 2016 with my partner, I obviously stopped working. My salary really dropped in the first two years of entrepreneurship by almost half. When I started the business I was working for about $100,000 salary to maybe $50,000. I kind of adapted back down and it wasn’t that difficult. I was forced to change the way that I looked at money, especially now as a business owner as well. So there’s a lot of different self-education that I had to do to realign things to make it work, because I had to make it work. That helped me kind of change my relationship with money a little bit and look at it coming in and distributed in a different way compared to when I had a salary. But it still seemed like no matter how much I was making, I wasn’t really getting ahead financially. I think a lot of people in that boat. 

 

Tom: Yeah, that’s your lifestyle inflation, where it just kind of is, as your salary increases, it’s time to upsize the house. 

 

Vlad: I like that term, lifestyle inflation. 

 

Tom: It just kind of creeps up on you where, every time you get a raise in a traditional career, it just turns into more expensive cars and houses and whatever kind of toys and stuff. More travel too, maybe. There’s always a reason to find a way to spend. 

 

Vlad: Well, the truth is, psychologically, for the majority of the time, we’ll choose those short-term rewards in exchange for a long-term benefits, even if we know and are fully aware of it. And that’s the whole thing of the financial literacy picture; people that are determined to discover the different tactics and specific concepts around understanding financial terms, they can do that. The problem is understanding how to change behavior? How do we actually do the right thing that we know we should be doing but we don’t do it anyway? 

 

Tom: How does someone decide what kind of borrowing option is right for them? And I’ll give you an example. My first time having any kind of debt other than a credit card, was when I went into the bank wanting a car loan. I figured I need a car loan because I wanted to get a car that doesn’t break down all the time. So I went and worked for a car loan but I didn’t know that much about personal finance at the time and I’m so glad that the guy sat down with at the bank said, “Instead of getting a car loan, get a line of credit. It’s actually going to have a better interest rate, but also, as you’re paying it down, you’ll have some other form of credit available other than the credit card.” In that case, in my situation, I went in with the wrong choice in mind and the credit line was much better for me. If you have a different example, that’s fine too. But how does someone decide what different product they might need? 

 

Vlad: Well, that’s a great question. The truth is, there are a lot of different products that are made for different consumers. And there are a lot of lenders that only specialize in a few of these different products. Sometimes it’s just one. I’ll give you an example. In the automotive industry (as a whole) may have a very different group of lenders that service that industry as opposed to the mortgage industry. There’s not always going to be a lot of crossover. The big banks, of course, are very large and pretty much have a division to tackle almost all of those different ones. But the purpose of your financing need, of course, will dictate a lot and will eliminate right away and narrow down things for you. So, if you’re looking to purchase a home, you’re looking for mortgage providers and trying to decide which of those is the right for you and what type of mortgage the right for you. For auto financing, it’s a similar situation. For personal loans and credit cards, again, it’s a similar situation. But typically, what you want to do when deciding is see it from a lender’s point of view and understand who you are as a financial consumer. Also, you need to know what type of financial product it is that you’re looking for. For instance, who you are as a financial consumer will be made up of your profile, your credit history, your income level, whether you have assets such as a home or a vehicle. All of those will be taken into account. Let’s try an example of somebody looking for $10,000. Let’s leave an ambiguous reasonable for what it’s for. You can have one person who is a full-time employee, maybe in their 40s. They own a home with a mortgage that has some portion of it paid out over the past eight, nine years. You can have another person who is a younger person, a full-time Uber driver and does a few freelancing gigs on the side. Then you can have another person who is a single mother with a child and receives the child tax benefit as part of her income, and she also has a part-time job. Those three people could all potentially get access to the $10,000 but they have totally different ways to go about it. The homeowner can use a home equity loan and use the equity in the home to unlock some credit. A lot of times it is used for home renovation. There are larger loans for maybe $30,000, $40,000 or $50,000 to renovate your kitchen, your basement, things like that and they’re usually quite low interest rates. You can just get it as a as a line of credit. It’s a very common. It’s actually a very, very common form of financing in Canada for homeowners. The second person who is an Uber driver and a freelancer, there are financial companies now that are specializing on the “gig” economy. A gig economy and entrepreneurship is so big right now. It’s hot right now. And Covid has accelerated it greatly. People that are very talented that never did it—maybe they thought about it but never did it. Well, now they have no reason not to do it anymore. They’ve launched a little side hustle. A side hustle is becoming a thing as well. People are looking for multiple streams of income. And guess what? There are now financial companies that are looking to serve those people because traditional financial institutions aren’t always equipped to interpret your financial profile if you have those nontraditional sources of income. And the single mother—there are multiple lenders that specifically work with people that are on the child tax benefit. It goes down to a very deep level. And my point here is that you can have a very wide spectrum. Once again, what I recommend people do is, we’ve built out a library of resources on our website to help you exactly navigate those waters. We have a great deal of resources that will explain to you what type of product is the right fit, depending on what your situation is, and who are the specific companies that have been vetted that are part of our marketplace on Smarter Loans that are offering those products. And we’ve already established relationships with those companies. There is more than 100 financial brands that are part of our Smarter Loans ecosystem that people come and visit and explore and can learn about and use. Over 40,000 people come in every month to explore that ecosystem. Coupled with all the content on the educational side of things—so they can actually understand which is the right product for me, I would say is a pretty good step for somebody who is trying to answer the question, “What are the right options for me? And if I want to go ahead, what is the next step to take from here?”

 

Tom: Obviously, Smarter Loans is a great option to find what you need. But even in general, how do you make sure you’re going with the right source, even if it’s from your site? Going back to my trips to my bank, with my very first mortgage I just went to my usual bank. The same place I had that line of credit and my credit card. I went to that bank and got a mortgage. For my second house, my eyes were opened to the magic of mortgage brokers. They’ll find you a better rate and you’ll have so many different options. Is that kind of the case? Maybe using your site or links on your site to other brokers, perhaps in the case of mortgages? How do you make sure you’re getting the most variety of options so you actually get the best rate? Sometimes it’s not just rates but other factors as well?  

 

Vlad: Well, definitely, the rate isn’t everything. There are a lot of factors and that’s why it is a more sophisticated ecosystem where it’s very important to make the right decisions. I think for people that are trying to consider if a provider is the right provider for them, the thing to look for is, are they a reputable provider? This is somebody you’re going to be dealing with for the next while so you want to make sure that you’re dealing with a legitimate company that has a good track record. When were they created? How long have they been in the market? How many customers have they helped? Are there any articles or videos about them? Companies right now are much more public facing. In more cases than not, you should be able to find some good information about them online. Look at some reviews and testimonials. It’s the general common sense things that I would look for when trying to evaluate a potential loan provider. Then go one level deeper  to make sure they have transparency about fees, about terms, and that they’re able to answer your “what if” questions. What if you were to break that mortgage after three years as opposed to the 5-year-term? What if you’re not able to meet one of your biweekly payments? What happens in that situation? What if you change your jobs? Just ask all kinds of questions, because asking those questions is how we get educated about a subject. That’s all it is. And, at the at the end of the day, we don’t know what we don’t know. The only way to get there is to just keep asking. They might give you an answer that will stimulate another question. My main recommendation is to always as questions to a point where you no longer know what to ask anymore. By then you may have got all the information you need but you’re also going to have a very good understanding about what you’re doing. And confidence is key. That’s how you’re going to get confident about making a decision. It’s not like there’s only one lender that’s right for you or one mortgage that’s right for you. You could look at three different scenarios and with each one you could argue, “I would rather go with this mortgage.” People can argue one way or the other. So it’s not always like there is a definitive right answer. But the right decision is the one that’s made with confidence and comes from empowered access to information—getting those answers. That’s how we’re going to make decisions with confidence. 

 

Tom: You brought up a good point, that it’s easier and easier now to look into these companies to see what they’re saying and what’s being said about them. When I first got this list of mortgage options from a mortgage broker, I would say half of them I had never even heard of because I was used to big banks and secondary banks. But then you’ve got these small mortgage companies and if you don’t feel comfortable because you’ve never heard of them, at least nowadays it’s a lot easier to dig a little deeper and find different reviews, find different opinions on them. 

 

Vlad: You’re absolutely right. You look at the financial industry, specifically the lending industry as a whole, for the past 10 years, it’s very much been very much a booming sector in Canada. There have been a lot of new companies that have entered the space. They’re launching new products. So from an industry point of view, it’s actually been a very blooming marketplace. From a borrower point of view, however, if you look at the industry five years ago, which is one of the main reasons we started our business, the borrowing experience was actually quite broken. There was very low trust for the exact same reason you just mentioned, because nobody knows about these companies. There was a low awareness about anything that’s not a bank. And as a result, there was low adoption of these types of products, even though some of them were (and are now) extremely innovative. That’s what we wanted to fix. When we started our business we said we were going to fix this problem and do it by creating a marketplace of some of the best innovative financial products and companies behind them. And we’re going to invest heavily into educating people about how different products work and empowering them to know which product is the right one for them. And we’re doing that through our research teams, through our writers, our videographers that create content for our YouTube channel. All of it is driven to increase financial education, to increase financial literacy and awareness about financial products and empowering people to make better decisions for themselves. 

 

Tom: Yeah, I like it because it’s great that there’s more and more options, this whole fintech explosion, whether it’s boring or robo advisors or anything. But it’s nice to have the option to distill that down and make good decisions. Can you tell people where they can find you online and let them know about some of the things you’ve been doing online. I know you’ve been doing your podcast and everything. 

 

Vlad: Yes, we recently started our video podcast called, The Smarter Money Show. It is a video podcast designed to help people get better with money in life and in business. It’s for people from all walks of life. Maybe you want to be financially free. Maybe you want to start a business. Maybe want to get a promotion or build wealth and learn investing. We speak to people that are authors, thought leaders, entrepreneurs, CEOs that have experience in this field. We’re trying to get their lessons. So definitely check that out. That’s at smartermoneyshow.com. I’m also the host of the show. My name is Vlad Sherbatov and I can be found on different social media. And if you are looking to learn about loans or how they work or companies that offer loans in Canada, you can visit our website, www.smarter.loans.  

 

Tom: Great. Thanks for being on the show.

 

Vlad: Tom, it’s been an incredible pleasure. Keep up the good work. Love your blog. Loved being on the show and had a great time chatting with you. I’ll talk to you soon. 

 

Tom: Thank you, Vlad, for showing us that being money smart requires knowledge about credit and not just savings and investing. You can find the show notes for this episode at maplemoney.com/160. I want to take a moment to thank you for listening to the Maple Money Show. I appreciate your support in helping us continue to grow. If you have the Apple podcast app on your phone, can you pull up any money and give it a quick rating? Even better, leave a review and let everyone know what you think of the show. I look forward to seeing you back here next week when we have JD Roth on the show to discuss his decision in selling his home and looking for one that’s perfect for him. See you next week.