Predatory lending practices are everywhere and can affect all consumers, no matter who you are or what your financial situation is. Predatory lenders are just that, predatory. They prey upon anyone and everyone looking for a loan. Their specialty is, of course, those in desperate financial situations, but all consumers must be weary of the lenders they choose to do business with.
What Is Predatory Lending?
Predatory lending is when a lender enforces unfair, illegal, or unreasonable loan terms upon their borrowers. Predatory lenders might also try to force borrowers to accept these unreasonable terms or take on a loan that they cannot realistically afford.
These lenders typically take advantage of people who are in desperate need of immediate money, have minimal financial knowledge, or live in low-income areas. These lenders can often be found among payday loan lenders. Predatory lenders think only of themselves and their profit margins.
Examples Of Predatory Lending
While these loans aren’t inherently predatory, they are expensive and some lenders may engage in predatory ways.
Consumers should understand these various loan types and how some can worsen debt issues if precautions aren’t taken:
Payday Loans
If you’re not careful when taking out a payday loan, you could find yourself unable to pay back the loan on time and cover the exorbitant interest payments associated with the loan. Payday loans are notorious for being the most expensive type of financing products, with APRs as high as 600%. Plus, they must be repaid in one lump sum payment in a very short period, often in as little as 2 weeks.
Most borrowers can’t pay back the loan by their next paycheque. In this case, many wind up looking for another quick loan to cover their original payday loan. This puts them at risk of getting themselves into a seemingly never-ending cycle of debt that they can’t get out of.
Auto Title Loans
An auto title loan is secured by your vehicle, which makes it relatively easy to qualify for, as long as you own the vehicle outright with no remaining balance on a car loan. However, these types of secured loans come with interest rates that are higher than most other secured loan types.
Further, you risk losing your vehicle if you’re unable to pay the loan off by the end of the term, which can be difficult given the very short-term lengths, which can be as little as 3 months. Because the interest rate is so high, the overall amount you’ll owe could be far more than the original loan amount.
Are Subprime Mortgages Considered Predatory?
A subprime mortgage is typically provided to bad credit borrowers who are unable to get approved for a home loan through traditional means. These types of mortgages typically come with higher interest rates, making them much more expensive than conventional mortgages.
Subprime loans aren’t necessarily predatory, but their higher rates make them more expensive and therefore more difficult to repay, especially for borrowers who have a history of bad financial habits. Since mortgages are secured by your home, a predatory lender can profit not just from sky-high interest rates, but also from the sale of your home in the event they repossessed it due to a loan default.
Subprime mortgages make it easier for more borrowers to finance a home purchase. But oftentimes, the higher rates and bigger loan amounts put borrowers at risk of default, especially when the loan terms come due and rates are much higher at the time of mortgage renewal.
Predatory Lending Practices: How to Protect Yourself Against Predatory Lenders
The best way you can protect yourself against predatory lending is to be as informed as possible about your rights as a borrower as well as the common practices of these types of lenders. Predatory lending is not a new idea which means we have a pretty good idea of what to be on the lookout for and how we can defend ourselves against them. Here are the most common practices of predatory lenders.
Unsolicited Loan Offers
Legitimate lenders usually don’t go around asking consumers if they want a loan through the mail, online, or over the telephone, especially if they’ve never worked with you before.
Promise of Guaranteed Approval
If a lender straight out promises to approve you for the loan you want without asking for any type of risk assessment (credit check, income verification, etc.) it’s too good to be true. Even lenders who work with credit-constrained borrowers need some information about the financial standing of all potential borrowers. No one can guarantee approval for a loan.
Pushy Loan Agents
If the loan agent you’re working with seems a little too eager to get you to the sign on the dotted line quickly, there might be an alliterative motive behind their eagerness.
Excessive Fees
Predatory lenders often try to tack on extra costs to their loans in the form of fees and they often don’t make it very clear that they’re charging these fees. Always read your contract before you sign it and make sure you question anything you don’t understand or don’t feel is fair.
Documents with Blank Spaces
If a document that you’re supposed to sign has any blank spaces, do not sign it. A predator lender may add additional information after you sign. This could lead to serious financial issues down the line.
Are There Laws To Protect Borrowers From Predatory Lending?
Yes, there are laws in place that are designed to protect consumers from predatory lending, both on a federal and provincial level. Bad credit borrowers have far fewer options when it comes to loans and credit products, and because of this, they may be a target for predatory lenders.
Under the Criminal Code in Canada, it’s an offense to charge more than 60% on a credit product. Some provinces also have regulations in place for high-cost credit lenders, including BC, Alberta, Manitoba, Quebec, and Newfoundland. Ontario may soon join these five provinces with its own set of regulations for high-cost credit products.
Borrowers who believe they are being treated unfairly or charged an overly high interest rate should consult with the Consumer Affairs office in their respective province.
How To Deal With Dealing With Predatory Loan Debt
Every year, hundreds of thousands of Canadians all across the country, fall victim to predatory lending practices. It’s an unfortunate fact, but there way several ways to deal with the debt that arises from predatory loans.
Credit Counselling
Before you make any decisions about stopping your payments, taking out another loan, or maxing out a credit card, you should speak with a reputable and licensed credit counsellor.
They can analyze your financial situation, come up with a plan, and advise you on the steps you should take to deal with your debt. For some, a credit counsellor may be all you need to deal with your debt, for others, another debt relief option may be more suitable.
Debt Consolidation Loan
A debt consolidation loan is a great option for many consumers, especially those who have a lot of high-interest debt such as payday loans. A debt consolidation loan will allow you to pay off all your other debt so that you’ll only need to make payments on one new loan.
Your goal should be to get a new loan with a lower more manageable interest rate so you can save some money on interest charges while working to pay off your debt quickly.
Debt Management Program
A debt management program (DMP), also referred to as a debt consolidation program is often best suited for those consumers who cannot get approved for an affordable debt consolidation loan. When you enter a DMP you’ll work with a trained professional who will guide you through the whole process and deal with your creditors on your behalf.
You’ll meet with a professional who will assess your finances, create a plan for you, and even provide you with advice on how to better manage debt in the future. Here’s what you can expect from a DMP.
- You’ll be required to pay off your debts in full, usually over 2 years up to a maximum of 5 years.
- You may be able to qualify for lower interest rates (keep in mind that your creditors may not agree to this).
- If you’re debt professional can negotiate lower interest rates for you, you will save money on interest charges.
- You’ll make one affordable monthly payment through your DMP which will then be distributed to your creditors.
A DMP will not reduce the amount you owe, but instead, help you pay off all your outstanding debts in full within a more manageable period.
Debt Settlement
If you simply cannot afford to pay back all your debts in full, debt settlement might be the best option for you. Whether you choose to contact your lenders and creditors yourself or hire a debt settlement company, your main goal is to have the total amount of money you owe reduced to a more manageable amount.
Once you’ve paid the agreed-upon amount to each of your creditors, usually in lump sum payments, your debts will be marked as paid off in full.
Consumer Proposal
A consumer proposal is a slightly less severe option than bankruptcy and should always be considered first. It is similar to bankruptcy in that you’ll work with a licensed insolvency trustee who will create a proposal for your lenders and creditors. If your creditors accept the proposal, then you and your creditors will have to adhere to the details of the proposal.
Typically the goal is to have your interest rates frozen and the total amount of debt you owe reduced. You may be required to make one large payment or installment payments; again this depends on what everyone agreed to in the proposal. Only unsecured debt can be included in a consumer proposal and you must owe less than $250,000.
Bankruptcy
If you’ve considered filing a consumer proposal and it simply wasn’t the right option for you, then you may need to file for bankruptcy. It is a legal proceeding and therefore you must work with a licensed insolvency trustee to complete the process.
Unfortunately, while bankruptcy may be the right choice for you, it will still negatively affect on your credit score and remain on your credit report for up to 7 years.
Bottom Line
When it comes to dealing with debt from predatory lending, it’s important that you first, seek the help of a trained professional and second, make all decisions based solely on your financial standing. Choosing the right debt relief option is a serious decision but once you find the best fit you’ll be on your way to paying down your debts and securing the financial future you deserve.
