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As a Canadian consumer, there are plenty of different credit products that you can use to borrow and even more businesses to buy them from. The only problem is that not all of these lending sources are upfront about the overall conditions of the product you would be applying for, particularly when it comes to the costs.
If you’re not careful, you might even fall victim to illegal interest rates, absurdly high fees, or other methods of deceit. Want to know how to protect your finances against predatory lenders? Then check out this list of 5 things to watch out for when borrowing online.
1) Hidden Fees
One of the most important things to watch out for is a contract with high fees hidden within the fine print. These extra costs are usually for various administrative services, such as:
- Insurance – Some lenders may charge you for a “loan protection plan”, which is meant to cover a portion of your debt if you get sick, lose your job, or miss your payments for some other reason. Although these plans are completely optional, they are often not advertised as such, and sometimes they are even added to the contract without your knowledge.
- Prepayments – If you aren’t careful, some lenders will charge for paying your debt ahead of schedule. Although the lender might tell you that your term is open-ended and early payments are penalty-free, the contract could stipulate fees for making larger payments, modifying your payment plan, or closing your account.
Check out much you may end up paying on your mortgage prepayments.
- Cheque & Payment Processing – If your lender has to process a cheque or wait for it to clear, they may charge you an extra fee of over $100. The same goes for many other types of online or bank transactions, including your loan payments themselves. These services should be relatively low-cost, if not free with a reputable lender.
Whether or not the lender declares these kinds of fees upfront, they are often simply trying to charge you more in exchange for their credit product. In cases of fraud, they are trying to get as much money from you up front before they just disappear.
In reality, you are never obligated to purchase insurance for a personal loan. Plus, it’s illegal for a lender to ask for any kind of payment before you receive your loan funds. Always read the fine print and speak to a professional financial advisor before you give away any information to a lender that you think might not be trustworthy.
2) Misleading APR
Another thing to watch out for is a high, borderline illegal interest rate. According to the Criminal Code of Canada, lenders are allowed to impose rates of up to 60% interest for their products. To act like they’re giving you a better deal on a loan, a lender might offer you a “much lower” rate; let’s say 46%.
However, interest can be tallied up in several ways. If you go by the federally mandated calculation system, a 46% interest rate adds up to just under 60% APR. Sadly, these high rates, coupled with exorbitant fees and long repayment terms can mean you’ll pay more than half of your actual loan amount in interest alone. Even if you pay early, you might still be subject to a number of fees, which would simply balance out the equation.
“You’re a High-Risk Client”
High rates are a frequent issue seen with alternative lenders, who take in clients that can’t get approved by banks or credit unions because they have bad credit, debt problems or a low income. To justify their high interest rates, the lender will say that they’re taking on risk by approving you since you have more chance of defaulting.
Because alternative lenders are regulated by the provincial or territorial government, it’s tougher to find one that won’t charge you an arm and a leg for their products. On the other hand, there are times when the Bank of Canada’s interest rates are under 1% so if you can qualify for a major lending company, like a bank, that is generally a safer option.
3) Missing Payment & NSF Penalties
Remember, almost every credit product comes with fees to compensate for any administrative or financial services the lender must perform. That said, there’s a big difference between charging customers for an employee’s time and tacking on unnecessary fees. Here are some of the other fees that some lenders will apply to your final bill:
- Late or Incomplete Payments
- Stopping Payments
- Missed Payments
- Non-Sufficient Funds (NSF)
Basically, if you don’t make your scheduled payment in full or there aren’t sufficient funds in your bank account when your lender withdraws a pre-authorized debit payment, you might be subject to a combination of these fees.
Some lenders will also tack extra interest onto your debt and report your payments to Canada’s credit bureaus, which can lead to a drop in your credit score. Watch out, because these kinds of fees and penalties are technically legal for a Canadian lender to charge. Once again, to remain “transparent” about their products, odds are the lender will hide their fees within the fine print of their website and contracts.
Check out when lenders may charge you loan origination fees.
4) Special Offers And Pressure Tactics
Watch out for lenders that want you to seal the deal right away. They may try to reel you in with:
- Limited-Time Offers – A lender might tell you that you’re a preferred client or you’ve been pre-approved for a limited offer, such as a low rate or interest-free period. Of course, you need to sign up and hand over your financial information right away to obtain these benefits.
- Obligations – Some lenders go the other route with full-on pressure tactics, such as telling you that you must pay fees in advance or purchase loan insurance. Whether it’s before or after you’ve applied for a credit product, you are not obligated to pay for anything until you sign an official loan agreement.
- Verbal Tactics – Phone and in-person transactions are where many lenders really profit. After all, good salespeople can be convincing and skilled at avoiding your questions and selling you overpriced products. This is especially problematic during periods like the COVID-19 pandemic, where many people are out of work.
- Debt Collections – Similar pressure tactics can be seen when you default on a loan. Too many late or incomplete payments are followed quickly by extremely high penalties and debt collection harassment. If the lender is “reasonable”, they might offer a second loan to cover your first, which is illegal in most of Canada.
Always take your lender’s website or offers with a grain of salt. While it can be hard to get approved with a bank or credit union when you’re considered a high-risk client, the rates and fees you end up paying for an alternative credit product might not be worth it.
5) Broker Fees (When The Lender is Also the Broker)
Be wary of lenders that also advertise themselves as brokerages that help you find the best credit products and rates. Of course, the other lending sources they connect you with are part of their own network, so they make all the profits. Since they’re technically a third-party company, chances are they’ll charge you for brokering the deal too. This is simply an unnecessary charge for you to be paying on top of all of the other costs of a loan.
Check out which loans you should avoid in Canada.
Protecting Your Finances Against Untrustworthy Lenders
Some lending businesses are difficult to regulate, which allows them to bypass federal rules and overcharge you for products that may not help you in the first place. This kind of situation gets even more tricky when you consider how hard it can be to qualify for credit with a bank or credit union. Remember, just because a lender or brokerage offers you a “good deal”, it doesn’t mean they’re looking out for you. Make sure to watch out for these 5 things when selecting a credit product, particularly when dealing with lenders online.
If you’d like to file a complaint against a federally regulated lender, check out this page on the Government of Canada website. If you’re dealing with a provincially or territorially mandated lender, look at this list of Federal oversight bodies and other regulators. For any other information about lenders, interest rates and credit products in your area, check out our lender directory.
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