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The COVID-19 pandemic has caused financial stress for thousands of Canadians. While the Government of Canada has introduced a number of financial aid programs, there were still many Canadians who have fallen through the cracks, particularly credit-constrained Canadians. As a result, they have turned to high-interest credit products like payday loans to help cover their expenses. In fact, in a study by Loans Canada, 20% of credit-constrained Canadians had already taken a loan during the early days of COVID-19 and the results indicated that they were likely to take on additional credit if COVID-19 continued. While these loans can be extremely helpful in an emergency situation, they can just as easily ruin people’s finances.
Learn when and how to create an emergency fund.
COVID-19 and The Rise of High-Interest loans
A new study by ACORN showed a surge in demand for high-interest credit products during the COVID-19 pandemic. Results showed that the majority of respondents relied on payday loans (70%) and installment loans (45%) in order to pay for everyday living expenses. This surge in demand is in part due to the lack of alternatives available for these borrowers. According to the study, 40% of borrowers in need of financial help had first reached out to their banks but were rejected. With no other option, these borrowers were forced to seek lenders with costly lending terms but more lenient borrowing standards.
Check out which loans you should avoid in Canada.
Dangers of Relying on High-interest loans
As mentioned, borrowers who rely on high-interest loans are subjected to unfavourable terms that can make the loan unaffordable. This, in turn, can lead the borrower into a cycle of debt; a debt trap that causes you to continuously take on new loans to cover your old loans. Borrowers who’ve fallen into this trap have reportedly taken these loans more than 10 times in a year. Results from the Acorn study also revealed that borrowers don’t usually rely on these loans more than once unless they are stuck in a cycle of debt.
Do you need help getting out of debt? Try reaching out to a credit counsellor.
Vulnerable Canadians Are Being Taken Advantage By Predatory Lenders
These high-interest loans aren’t the only problem. Often the lender providing the loan takes advantage of borrowers by omitting certain information, using aggressive sales tactics, and other questionable practices.
Results from another Loans Canada study have shown that some lenders charge borrowers fees that are hidden in the loan contract. This is exactly why it is recommended that you take the time to review your loan agreement prior to signing. While some borrowers simply forget or choose not to, others are forced into signing quickly due to pressure from the lender. Both studies from ACORN and Loans Canada show that respondents were rushed or pressured into signing a loan contract quickly. This is a typical tactic predatory lenders use to avoid explaining the true cost of the loan to the borrower.
Without the proper time to review the loan agreement, borrowers may miss optional costs added to the loan such as loan insurance. Both the ACORN and Loans Canada study has shown that lenders often omit disclosing these optional costs. The studies showed that respondents were charged for loan insurance without their explicit consent and that they were unaware of the cost until it was debited from their bank account. This is extremely concerning, as most of these respondents come from low-to-moderate income levels. As such, these charges can really leave them cash-strapped and more vulnerable to the cycle of debt.
Many borrowers (22%) have relied on these high-interest loans In an effort to increase their credit score. Considering they have been previously denied by their banks, this usually seems like a smart option. However, in the study by Loans Canada, the report showed that lenders often made false promises that adversely affected the borrower. For example:
- 44.3% of respondents had payments that were not reported to the credit bureau despite their lender saying they would.
- 55.9% of respondents had a lender that performed a hard credit check when promised a soft credit check.
- 32.7% of respondents had a lender who reported incorrect information to the credit bureau.
Given that many of these individuals had poor credit to begin with, these negative impacts can greatly affect their ability to access affordable credit in the future.
Borrowers who have been denied by banks are not only subject to predatory lenders, but lenders who make them feel uncomfortable. The Acorn study revealed that 60% of respondents were uncomfortable and over 50% of respondents were unsatisfied with their experience. Even in these unprecedented times, only 7% of respondents found their lender helpful when faced with financial difficulties due to COVID-19. Similarly, the Loans Canada study found that 50% of respondents were being denied financial support from their banks during the COVID-19 pandemic. In general, it seems borrowers that struggle to access credit are often treated unfairly.
Check out if you qualify for the CRB COVID-19 benefit.
Given the numerous studies that have shown the inequality credit-constrained borrowers face, it’s imperative that the federal government creates a strategy that will help these individuals access better financing options. All Canadians deserve a fair chance to improve their finances without having to drown in debt.
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