Alternative lenders have leveraged the power of technology and data to enhance the underwriting process, improve customer experience, and overall make financial services more accessible to individuals who are underbanked or who have poor credit. Since alternative lenders work outside of the traditional regulatory framework that banks and other financial institutions follow, they are subject to less-direct regulation and oversight, which allow them more control over their lending standards and procedures. However, they are still required to comply with specific rules and regulations. Unfortunately, despite provincial and federal lending regulations on cost disclosure, price caps on fees and interest, misleading representation, and other unfair lending practices, there are still regulation gaps and risks consumers face when borrowing in the alternative lending market.
In order to understand the average experience of a borrower in the alternative lending industry, the challenges borrowers face, and how the online borrowing experience can be improved, Loans Canada surveyed 1477 individuals who have borrowed from online and payday lenders. The sample is composed of individuals who are considered to be credit-constrained as:
- 76.2% have been rejected for a loan within the last 12 months
- 61.5% reported having a low credit score
- 55.3% have a household income of less than $40,000.
Experience With Online and Payday Lenders
As mentioned, borrowers with poor credit often rely on alternative lenders (online lenders and payday loan providers) to gain access to the credit products they need. When asked about their experience with these lenders, the majority of respondents reported that the online and payday loan application process was fast, easy, safe, and transparent. However, when questioned on specific details regarding their borrowing experience, a concerning proportion of respondents reported experiencing problematic or unfair lending and debt collection practices.
Challenges Credit Constrained Borrowers Face
The survey showed that a significant proportion of respondents have been subject to aggressive sales tactics, misuse of information, and other unfair lending practices. Respondents have reported their lender using unnecessarily complex terminology to mislead them into accepting unfair loan terms (33%) or even services they did not need (27%). Borrowers also claimed to be pressured into signing a loan contract due to a “limited time” offer.
Undisclosed and Hidden Fees
Other unethical behaviours reported include lenders charging undisclosed (22.4%) or hidden (32.8%) fees. These results are a testament to the importance of reading and understanding the terms and conditions of a contract prior to signing. If an oral agreement is made with a lender, the borrower should make sure to have the details confirmed in writing. While oral agreements are legally binding in Canada, they are hard to contest if the borrower signs a contract that states otherwise.
Another issue borrowers have faced involves a common method of repayment in the alternative lending industry: pre-authorized debits. Pre-authorized debits are a payment method that allows the lender to automatically debit the borrower’s bank account on predetermined dates. Unlike automatic payments, where the borrower would give their bank permission to send money to the lender, here the lender is automatically pulling money from the borrower’s bank account. This payment method, while certainly convenient, can expose consumers to more risks such as NSFs and in some cases, unplanned debits.
- 33.6% of respondents complained that their lender had debited their bank account after they had asked them not to
- 35.5% of respondents had to place a “stop payment” on a lender with their bank.
- 33% of respondents claimed their lender used unnecessarily complex terminology that misled them to accept unfair loan terms.
- 27% of respondents claimed their lender convinced them to accept services they did not need.
- 29% of respondents reported being pressured into signing a loan contract due to a “limited time” offer.
- 22.4% of respondents reported being charged fees that were not in the contract.
- 32.8% of respondents reported being charged fees that were hidden in the fine print.
- 28.7% of respondents reported being charged a rate that was different than what was verbally agreed upon.
- 28% of respondents reported being charged loan insurance fees without their explicit consent.
- 33.6% of respondents complained that their lender had debited their bank account after they had asked them not to.
- 35.5% of respondents had to place a “stop payment” on a lender with their bank.
The Use of References
Alternative lenders have their own standards and requirements for loan approvals which involve assessing the applicant’s overall financial health including income, job stability, debt levels, and more. Similar to an employer using references to verify a candidate’s past performance, many lenders in the alternative lending industry will also use references to gauge a borrower’s trustworthiness.
The survey found that almost three quarters of respondents (74.1%) were asked to provide references. They were asked to provide personally identifying information such as the name of the reference, their phone number, and relationship to the borrower. However, results also showed that some borrowers were asked to provide other intrusive information about their references, such as:
- Reference’s address – 42.0%
- Reference’s job title – 27.7%
- Reference’s work phone number – 30.0%
- Reference’s work address – 23.1%
Information Collected on References
While it’s understandable that lenders may need this information to verify personal details, some lenders used the information beyond what it was meant for such as calling a borrower’s reference to notify them of the borrower’s missed payment (24.8%) or to collect the borrower’s missed payment (21.7%).
What Lender’s Used References For
Costs Beyond Interest Rates
Due to the additional risk alternative lenders take by lending to individuals with spotty credit, these lenders charge high-interest rates and fees. When asked, respondents reported being charged excessively for the following five fees:
- NSF fees – 47%
- Missed payment penalty fees – 32.4%
- Collection fees – 19.1%
- Loan closing fees – 16.9%
- Loan origination fees – 16.5%
In fact, while some lenders hide fees in the loan contract (32.8%), some had even charged borrowers fees that were not in the contract (22.4%). Considering the financial situation of many of these borrowers, charges like these can quickly lead to unmanageable debt.
Unethical Behaviors & Effect on Credit Scores
Borrowers who depend on alternative lenders for additional funding typically have a low credit score. To illustrate, survey results showed that 61.5% of respondents who have taken out an online or payday loan have low credit while only 7.9% of respondents who have taken out an online or payday loan have a good to excellent credit score.
With that in mind, it can be assumed that credit checks and reporting payments to the credit bureaus are important factors these borrowers consider when applying for a loan. Many individuals with subpar credit look for loans with no credit checks or lenders that promise to report all payments to the credit bureaus. As a borrower with subpar credit, these conditions are extremely important in building a better credit score. Yet, according to the survey results, respondents were often given false promises by their lenders:
- 55.9% of respondents claim they were promised a soft credit check but then had a lender perform a hard credit check.
- 44.3% of respondents claim they did not have their payments reported to the credit bureaus despite their lender promising to do so.
- 32.7% of respondents claim their lender reported the wrong information to the credit bureaus.
This is extremely disconcerting as each of these actions have a negative impact (or represent a missed opportunity) on these individuals who already struggle with low credit scores. Mistakes like these, together with the lack of accountability these lenders sometimes benefit from, can affect these borrowers’ ability to obtain more affordable credit in the future.
Regardless of the type of loan a lender offers or the requirements they have, at some point, they will likely have to deal with borrowers who miss payments. While some borrowers are cooperative, others are not, in which case lenders are expected to take reasonable action to collect. The following results illustrate borrowers’ experiences with collection practices and penalties for missed payments.
The survey found that of the respondents who have taken a loan from an online and/or payday lender:
- 26.7% have experienced aggressive behaviour from a lender due to missed payments.
- 51.3% did not experience aggressive behaviour from a lender due to missed payments.
- 21.9% did not miss any payments.
For this survey the following behaviours are considered to be aggressive: cursing, using a loud or intimidating voice, the use of threats such as sending an account to collections or taking a borrower to court, and other coercive language.
The results displayed that 51.4% of respondents who have dealt with an aggressive lender reported that they became aggressive after just one missed payment and 27.6% said they became aggressive after two missed payments. As a result, 58.5% of respondents who have dealt with an aggressive lender were called multiple times a day by the lender trying to collect payment.
- 26.7% of respondents have experienced aggressive behaviour from a lender due to missed payments.
- 51.3% of respondents did not experience aggressive behaviour from a lender due to missed payments.
- 21.9% of respondents did not miss any payments.
- 51.4% of respondents who have dealt with an aggressive lender reported that they became aggressive after one missed payment.
- 27.6% of respondents who have dealt with an aggressive lender reported that they became aggressive after two missed payments.
- 58.5% of respondents who have dealt with an aggressive lender were called multiple times a day by the lender trying to collect payment.
When lenders are unable to collect payment, many sell their delinquent accounts to an external debt collection agency. According to the survey, 32.9% of the respondents who have taken out an online and/or payday loan, have had their debt sold to a collection agency. To break it down, of the respondents who have dealt with an aggressive lender, 70.4% had their accounts sent to a collection agency and those who did not deal with an aggressive lender, 27.4% had their accounts sent to a collection agency.
A debt collector’s business model revolves around recovering overdue debts. While collection agencies are allowed to contact a debtor and ask for payment using certain collection strategies, every province has its own rules and regulations that collection agencies must abide by when trying to collect a debt from a borrower. However, oftentimes, Canadians don’t know their rights and fall victim to unethical intimidation techniques collection agencies use. Some collection agencies even use illegal tactics to collect payment from debtors.
In Canada, it is illegal for collection agencies to use abusive, intimidating, or profane language when trying to collect a debt from a borrower. Yet, respondents have reported collection agencies threatening them with wage garnishment, jail time, lawsuits, and more. Even more alarming, 62.1% of respondents who have had their debt sent to collections have reported that a collection agency has misrepresented themselves when contacting them. Some collection agencies have been known to misrepresent themselves as law enforcement or an attorney in order to threaten and scare a debtor into paying. Some have even tried impersonating a third party by spoofing their number (52.7%).
Collection Tactics Used
Debt Collectors VS Lenders
When comparing unethical and illegal tactics collection agencies and lenders use to try and collect payment, borrowers experienced more aggressive and unethical behaviour with collection agencies than with lenders. From excessive calls to threats of legal action, debt collection agencies used such tactics to try and collect payment more often than lenders. When it comes to debt collection, it is important to be aware of the rules and regulations lenders and collection agencies must abide by when collecting debt.
- 32.9% of respondents had their debt sold to a collection agency.
- 70.4% of respondents who dealt with an aggressive lender were sent to a collection agency.
- 27.4% of respondents who did not deal with an aggressive lender were sent to a collection agency.
- 62.1% of respondents who have had their debt sent to collections have reported that a collection agency has misrepresented themselves.
- 52.7% of respondents who have been sent to a collection agency reported a collection agency masking their number as a third party.
While the alternative lending industry provides financial relief for many credit-constrained Canadians, it’s important to understand that entering into a lending agreement with a borrower is a two-way street. Alternative lenders must be held to certain standards to protect vulnerable consumers, but borrowers need to uphold their side of the agreement as well. When a borrower takes on debt they cannot manage, making it difficult for them to keep up with their payments, it creates a series of difficult challenges for the lender to navigate. Although it’s important for lenders to lend responsibly it’s also important for borrowers to borrow responsibly and not overextend themselves.
At the end of the day, not all but many of these issues can be solved with increased financial literacy. When a consumer understands the responsibilities they take on when borrowing, the consequences of being unable to make their payments, as well as the rights and responsibilities of the lender, they are better equipped to make smarter borrowing decisions.
From July 12, 2020, to August 03, 2020, a survey was conducted by Loans Canada. A convenience sample of 1477 Canadians who have borrowed from online and payday lenders were asked questions related to their borrowing experience. Participants were asked 25 questions and data was collected using Google Forms.
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