The Loans Canada team sits down with Gary Schwartz of the Canadian Lenders Association to talk about open banking.
Alternative Lending Study: The Borrowing Experience in 2021
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Many Canadians with poor credit rely on alternative lenders, oftentimes online lenders, for their financing needs. Although alternative lenders offer far more flexible qualification requirements for their credit products, the cost of borrowing is often much higher than at a traditional lending institution. In order to better understand the experiences and challenges credit-constrained borrowers face in the alternative lending industry, we’ve surveyed 3480 Canadians who have applied for a personal loan online.
About The Respondents
Survey respondents who applied for an online personal loan, whether they were rejected or approved, can be considered as credit constrained as survey results indicated the following:
- 51.8% of respondents have an income of less than $30,000.
- Only 13.8% of respondents have an income over $60,000.
- 52.6% of respondents have a low credit score.
- Only 11.3% of respondents have a good to excellent credit score.
Rent Or Own
- 76% of respondents rent.
Are Credit-Constrained Canadians Qualifying For Online Personal Loans?
As mentioned, alternative lenders have more flexible lending standards in comparison to big banks and other traditional financial institutions. This is why many Canadians with subprime credit rely on alternative lenders, especially for personal loans. According to the survey results, 81.8% of respondents have been rejected for an online personal loan while only 71.4% have been approved for an online personal loan at some point in time. Conversely, almost a third of respondents (28.6%) have never been approved for a loan while only 18.2% have been approved for a loan without ever experiencing a loan rejection.
- 81.8% of respondents who have been rejected for an online personal loan
- 71.4% of respondents who have been approved for an online personal loan
- 18.2% of respondents who have never been rejected for a personal loan they’ve applied for online.
- 28.6% of respondents who have never been approved for a personal loan they’ve applied for online.
Loan Approval & Rejection Rates
|Respondents who have been rejected for an online personal loan||81.8%|
|Respondents who have been approved for an online personal loan||71.4%|
|Respondents who have never been rejected for a personal loan they’ve applied for online||18.2%|
|Respondents who have never been approved for a personal loan they’ve applied for online||28.6%|
Why Are Credit-Constrained Canadians Being Rejected For Online Personal Loans?
When respondents were asked why they were rejected for an online personal loan, these were the top reasons given for rejection:
Reasons For Rejection
|Credit score was too low||85.3%|
|Income requirements not met||61.1%|
|Debt-to-income ratio too high||47.4%|
|Lender not interested in application||46.7%|
|Additional documentation required||38.1%|
|Borrower was not understood by lender||35.7%|
Are Online Lenders Providing A Helpful Service?
Online lenders tend to have a bad reputation due to the higher cost of borrowing they offer. However, they are still a necessary avenue for credit for a significant portion of individuals in Canada. Notably, survey results showed respondents who applied for an online personal loan had a fairly positive experience.
Of the respondents who were rejected for an online personal loan:
- 35% reported being offered help during their application process.
- 76% reported feeling respected
- 61.8% reported being taken seriously by their lender when they had questions or concerns.
Do Borrowers Understand The Cost of Borrowing?
Online lenders are often seen as deceptive credit providers who prey on credit-constrained individuals. But according to the survey results, 77% of respondents who were approved for a loan reported that their lender explained the personal loan costs clearly. Though it is good to see the majority of credit-constrained borrowers have had at least one borrowing experience where costs were well explained, there is still room for improvement.
Do Online Lenders Help When Borrowers Can’t Keep Up With Payments?
While Canadians are fairly responsible when it comes to paying back their debt, some may have trouble keeping up with their payments due to unexpected events like job loss or financial emergencies such as a car repair or medical expense. When this happens, individuals may end up defaulting on their loan. However, in other cases, some are offered payment relief solutions by their lender. According to the survey results, respondents who could not afford to make payments were offered solutions by their lender to help repay the loan.
- 54.1% of respondents who struggled with their payments were offered a loan payment deferral.
- 40.8% of respondents who struggled with their payments have had their loan restructured.
- 25.2% of respondents who struggled with their payments were offered a lower interest rate.
Payment Relief Solutions Offered By Lenders
|Loan payment deferral||54.1%|
|Lower interest rate||25.2%|
Negative Experiences With Online Lenders
While there are reputable online lenders, there are also predatory lenders who use unethical practices to pressure and confuse borrowers into accepting unfair lending terms. One of the most common tactics used is charging undisclosed or hidden fees. According to the survey, 34.5% of respondents approved for a loan said they’ve dealt with lenders who charged them fees that were different from the costs explained. This is in line with an alternative lending study conducted by Loans Canada in 2020, where 22.4% and 32.8% of respondents reported lenders charging undisclosed or hidden fees, respectively.
Other shady behaviours reported by respondents who were approved for a loan included being pressured to complete the application quickly (40.4%) and being pressured into buying credit building services (44.8%).
Unethical Lending Practices
|Charged fees that were different than explained.||34.5%|
|Felt pressured to fill their loan application quickly.||40.4%|
|Felt pressured to accept credit building services.||44.8%|
In fact, some lenders even added loan protection insurance into the contract without the respondent being aware. Loan protection insurance is an optional product that covers the borrower’s payments in the event they are unable to make their payments. This is often a costly and unnecessary expense for most borrowers. When asked, 23.8% of respondents approved for a loan reported being charged for loan protection insurance without signing up for it or knowing what it was.
Loan Protection Insurance
|Respondents who did not have loan protection insurance.||42.6%|
|Respondents who did have loan protection insurance.||33.6%|
|Respondents who had loan protection insurance but did not sign up for it or know what it was.||23.8%|
Debt Collection Practices In The Online Loan Industry
It is in every lender’s right to take action when a borrower is unable to repay their loan. Depending on the lender, some may choose to help the borrower make their payments by offering payment deferrals, loan restructuring, or a lower interest rate. On the other hand, some may resort to more aggressive forms of debt collection when a borrower is uncooperative and refuses to pay. Lenders may at times also sell debt to collection agencies. While all this is legal, some lenders use more unfair debt collection tactics. This includes excessive calling, using coercive language, threats and other harassive debt collection practices.
Unfortunately, while there are debt collection rules that prohibit collection agencies and federally regulated institutions from using certain aggressive debt collection practices, high-cost credit businesses like online lenders are not subject to these same restrictions given they are provincially regulated.
In Canada, there are currently only four provinces (AB, QC, BC and MB) that have implemented laws to regulate these alternative lenders. Depending on the province, some debt collection practices used by lenders could be illegal. To find out, please check your province’s high cost of credit legislation.
According to the survey results, lenders often attempted to recoup payments using some of the following methods:
- 28.4% of respondents who missed a payment have experienced a lender use hostile language toward them or their references.
- 28.5% of respondents who missed a payment have been threatened to be charged with a crime.
- 37.7% of respondents who missed a payment have been threatened to have their wages garnished.
- 36.2% of respondents who missed a payment have dealt with a lender who contacted their friends, family or employer through social media.
- 44.8% of respondents who missed a payment have experienced a lender contacting their references (work, family or friends) to discuss their debt.
Debt Collection Practices
In an effort to collect payment from respondents who missed a payment, lenders have:
|Used hostile language toward them or their references||28.4%|
|Threatened to charge them with a crime||28.5%|
|Threatened to have their wages garnished||37.7%|
|Contacted their friends, family or employer through social media||36.2%|
|Contacted their references (work, family or friends) to discuss their debt||44.8%|
|Sold their debt to a collection agency||60.2%|
Overall Online Personal Loan Borrowing Experience
Overall, the survey showed borrowers overall have had a more positive experience than a negative one. However, the results skew when comparing the experience of those who have only been rejected or approved. As expected, those who were only rejected had a more negative experience while those who were only approved had a more positive experience.
Online Borrowing Experience Between Genders
The gender wage gap issue is a concern for many Canadians. According to Statistics Canada, women between the ages of 25 and 54 earned on average 13.3% less per hour than men. This inequity between men and women has warranted closer attention, as women have been surpassing men in attaining higher education, which is synonymous with higher income.
The data showed similar inequality between men and women in terms of income, debt, and access to online personal loans.
Of the respondents who identify as female, 75.2% have been rejected for an online personal loan, whereas only 69.8% of the respondents who identify as male reported being rejected. This discrepancy may be explained by the fact that more women fell into the lower-income brackets than men. Similarly, the percentage of respondents who identified as female and carried debt, increased as the level of debt rose.
When comparing the level of debt between the two genders, a higher percentage of women carried debt than men at every debt level. Moreover, of the respondents rejected due to a high debt-to-income ratio, 56.6% were female and 43.4% were male, while those rejected due to income requirements, 58% were female and 42% were male.
Online Personal Loan Experience: Low-Income Earners vs. The Rest
According to Statistics Canada, low income is defined as a household that earns less than 50% of the median household income which is $62,900 as of 2019. This means those earning less than $31,450 fall into the low-income bracket. As such, we looked at the experience of those with an income below $30,000 versus those with an income above $60,000. When comparing the borrowing experience, those with a higher income had a better one because:
- they were less likely to be rejected overall (62.9% vs 75.5%)
- they were less likely to be rejected due to income requirements (26.7% vs 75.6%)
- they were less likely to have trouble being understood by a lender (23.5% vs 39.7%)
However, surprisingly those with a higher income were more likely to be rejected due to a low credit score and a high debt-to-income ratio. In fact, data showed that as income increased, the number of people rejected due to a high debt-to-income ratio also increased.
Borrowing Inequity: Indigenous Groups vs. The Rest
When comparing the Indigenous group vs the rest of the respondents, results suggested that there may be some inequity in their experiences with online borrowing. Data showed that there was a 7.9% difference between the rejection rates between Indigenous people (88.5%) and the rest of the respondents (80.6%). This difference is seen more with Indigenous men than women.
Rejection Rates: Indigenous Group vs. The Rest
|Indigenous||The Rest||Difference In Rejection Rates|
This difference can be seen in various areas of the online borrowing experience. When comparing the reasons for rejecting it was noted that more indigenous men and women were rejected because :
- Their lender needed additional documents that they could not provide.
- Their lender was not interested in their application.
- They had trouble being understood by their lender.
Reasons For Rejection Among Indigenous Women vs. The Rest Of The Women
|Indigenous Women||The Rest of the Women||Difference|
|Their lender needed additional documents that they could not provide.||43.4%||34.6%||8.8%|
|Their lender was not interested in their application.||54.7%||42.7%||12%|
|They had trouble being understood by their lender.||41.6%||32.6%||9%|
Reasons For Rejection Among Indigenous Men vs. The Rest Of The Men
|Indigenous Men||The Rest of the Men||Difference|
|Their lender needed additional documents that they could not provide.||47.7%||38.6%||9.1%|
|Their lender was not interested in their application.||51.6%||47.6%||4%|
|They had trouble being understood by their lender.||43.9%||35.7%||8.2%|
Similarly, data suggested that more Indigenous people were subject to lender pressure tactics and other unethical practices like charging them fees that were different than explained. The tables below show that there was approximately a 10% gap between the indigenous females (39.8%) and the rest of the women (30.6%) when asked if their lender ever charged fees that were different than explained. It also shows that more Indigenous men felt pressured to fill their loan applications quickly. There was a 12.1% gap between the Indigenous men (53.9%) and the rest of the men (41.8%). It should also be noted that more Indigenous females felt pressured to accept credit building services and were more likely to pay for loan protection insurance without knowing what it was or signing up for it.
Paid For Loan Protection Insurance Without Knowing What it Is Or Signing Up For It.
Pressured To Accept Credit Building Services
Pressured To Fill Out Loan Application Quickly
Charged Fees That Were Different Than Explained
Inequity Amongst Those With A Disability
According to the Canadian Survey on Disability (2017) by Statistics Canada, 22% or 6.2 million Canadians live with at least one disability. Those with a disability have historically been at a disadvantage in almost every facet of life. Oftentimes, marginalized groups such as those with a disability face inequity in terms of employment opportunities, financial security, and access to different products and services.
Unfortunately, despite alternative lenders being more open to those with subprime credit, the data suggests that those with a disability still face many hurdles when qualifying for a personal loan. Some of the main complaints respondents have were that there was a lack of representation and that their government-funded income was being excluded as a source of reliable income.
Here are some complaints straight from the respondents:
- “There is no disabled representation. Many people like me have a guaranteed income from the government but there is no way to recognize that in the applications most of the time, leading to declines.”
- “As soon as they hear I’m on long-term disability and unable to work, the change in attitude has been clearly felt even though I am not on social assistance but my income comes from my previous employer’s insurance company and CPP and is well above government programs for the disabled at $2803 net a month.”
- “Being on social assistance or disability excludes me from personal loans, which is [unfair] since it’s reliable income.”
Of the respondents with very good health (no disability or illness), 77.7% have been rejected for a loan, while respondents with very poor health (major disability or illness), 89.3% have been rejected for a loan.
When comparing respondents with very good health vs. very poor health, data showed that as the level of health deteriorated, respondents reported more negative borrowing experiences. For example, 23.0% of respondents with very good health said their lender was rude, while 34.8% of the respondents with very poor health said their lender was rude. Similarly, where only 29.2% of respondents with very good health felt uneducated due to the way their lender treated them, this number rose by 10% for those with very poor health (39.8%). People with disabilities or illness have a demonstrably worse borrowing and customer experience than those without disabilities or illness.
Similarly, when comparing the experiences of respondents who’ve been approved for a loan, 51.7% of the respondents with very poor health reported being pressured to complete their loan application quickly, while only 37.1% of those with very good health reported the same. This trend continues in terms of the fees charged versus what was explained and pressure to accept credit building services. Furthermore, when it came down to respect, those with very good health reported feeling respected as an individual, which is 8% more than respondents with very poor health.
Online Lending Experience By Level Of Disability
|Respondents with very poor health (major disability or illness||Respondents with very good health (no disability or illness)||Difference in experience|
|Cost of the loan was clearly explained by the lender||73.2%||78%||-4.8%|
|The fees charged were different than explained by the lender||43.6%||32.5%||11.1%|
|Felt pressured to complete the loan application quickly by the lender||51.7%||37.1%||14.6%|
|Was taken seriously by the lender||59.7%||62.5%||-2.8%|
|Felt pressured to accept credit building services by the lender||51.7%||41%||10.7%|
|Felt respected as an individual by the lender||70.5%||78.4%||-7.9%|
Of course, that’s not to say that all Canadians with a major disability or illness only have negative experiences. Of the respondents with very poor health (major disability or illness), 66.2% have still been approved for a loan.
Whether you borrow from a traditional bank, credit union or online lender, each comes with its own advantages and disadvantages. With online lenders, credit-constrained borrowers can take advantage of more favourable qualification requirements and gain access to credit products that they otherwise aren’t able to qualify for. Likewise, they also have to watch out for higher costs, hidden costs and other unfair lending practices.
Loans Canada believes increased financial literacy is a good solution to many of these problems, as this would equip consumers with the knowledge they need to borrow more responsibly.
From March 16, 2021, to April 19, 2021, a survey was conducted by Loans Canada. A convenience sample of 3480 Canadians who have applied with an online lender were asked questions related to their borrowing experience. Participants were asked 24 questions and data was collected using Google Forms.
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