Borrowing 101: how to avoid predatory lending pitfalls
33% of Canadians are using alternative lending sources for their borrowing needs.
While having various credit options beyond the big banks is a good thing, it can also leave you open to predatory lenders if you’re not careful.
But what exactly is ‘predatory’ lending?
Educators Mortgage Agent Level 1 – Regional Director, Lending Services, Nick Rao, explains, “Think of predatory lenders as sharks that are mixed in with an ever-growing sea of borrowing alternatives. Although these sharks can be difficult to spot at times, they ultimately have one simple goal—trapping vulnerable people into a loan that becomes almost impossible to pay off.”
What could make someone susceptible to such shady lending practices?
“Usually individuals with bad, little or no credit who are in need of solving an immediate cash crisis,” continues Nick. “That’s where the proverbial shark aspect comes in, as predatory lenders are quite adept at singling out and exploiting these types of borrowers. After all, when it feels like there’s nowhere else you can turn to, getting offered a subprime loan can seem better than nothing. However, what predatory lenders don’t tell you is the true cost of borrowing—as these types of loans typically carry high fees, in addition to an exorbitant rate of interest.”
When it comes to specific predatory lending pitfalls, here are 5 things Nick recommends watching out for.
#1: Payday loans.
This is the costliest type of predatory loan, charging fees equivalent to triple-digit interest rates.
For example, if you were to get a payday loan in the amount of $300 and pay if off in two weeks, you could in effect be paying an annualized interest rate as much as 442% according to the government of Canada’s website.
How is this possible?
Payday lenders are regulated provincially, which means they are exempt from Canadian usury laws (federal regulations governing the amount of interest that can be charged on a loan).
The combination of high payday loan interest rates in addition to exorbitant fees can create a debt vacuum, the likes of which can be almost impossible to escape from.
However, the 2023 Federal Budget introduced amendments to the Criminal Code to lower the criminal rate of interest to 35% APR (and launch consultations on whether the criminal rate of interest should be further reduced). It was also proposed to adjust the Criminal Code’s payday lending exemption so that payday lenders would be required to charge no more than $14 per $100 borrowed, from the current $30 per $100 borrowed (the government will also launch consultations on additional revisions to the Criminal Code’s provincial/territorial-requested payday lending exemption).
#2: Loans described as having a ‘fast and easy’ application process.
Predatory lenders are notorious for fast-tracking applications under the guise of making your life easier. But in fact, what they are trying to do is minimize the amount of time you’ll have to think, let alone ask any important questions before signing on the dotted line.
Don’t be fooled by this tactic.
Be sure to slow things down by reading all of the fine print and speaking up about any concerns or uncertainties. If they answer your questions, great—but if they deflect or start putting pressure on you to sign anything, this should be seen as a red flag. In which case your best course of action is to say “thanks, but no thanks” and then seek out other borrowing alternatives.
#3: Loans that come with the tagline ‘no credit check required’.
Worse than a lender that doesn’t let you ask questions is one that doesn’t ask you any.
After all, any credible lender will want to get a sense of your creditworthiness by checking your credit score and history before approving you for any type of loan. The reason predatory lenders choose to forgo this step is because they already know you are high risk—which is their justification for charging high interest rates and fees (to offset this risk).
#4: Loans that offer you repeated rollovers and refinancing.
Predatory lenders profit the most from clients that never repay their loans in full. This is why these types of lenders will continually look for ways to keep you under their thumb.
Car loan rollovers are a good example of this bad practice.
Let’s say someone owes money on a car loan, but decides they want to buy a new vehicle.
Even though that person didn’t pay off the principal still owing on the original loan, predatory lenders will suggest refinancing the new set of wheels by rolling the unpaid debt into the new car loan. This can worsen somebody’s financial situation and result in them owing more than the new vehicle is worth.
It’s basically piling debt on top of debt and that’s never a good thing.
#5: Secured lending.
This form of lending isn’t always predatory, but it is high-risk, as it involves borrowing against assets such as your car or home equity. If you should fail to repay your loan, the lender will then be free to repossess any and all assets offered up as collateral. So, just be fully aware of the risks before choosing to go down this lending path.
At the end of the day, financial literacy is key in protecting yourself from predatory lending.
That’s where we can help.
At Educators Financial Group, our approach is to educate clients on their credit and borrowing options. That way they can choose the solution that works best for their needs.
But what truly sets us apart from other financial institutions is our genuine understanding of your world.
From secured lines of credit and mortgages that comfortably fit with where you are on the pay grid to coming up with a plan to maximize your pension income in retirement. We can help you to navigate every corner of the financial spectrum, at any stage in your life.
Let’s start working on bettering your current borrowing situation, right now.
Sources:
https://www.ctvnews.ca/business/thinking-of-an-alternative-lender-what-it-could-mean-for-your-mortgage-1.6312531#:~:text=The%20figures%20show%20that%20in,cent%20the%20year%20before%20that
https://www.canada.ca/en/financial-consumer-agency/services/loans/payday-loans.html
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