Predatory lending is fraudulent, deceptive, and unfair tactics some people use to dupe others into loans that they can’t afford. It is closely tied to the concept of subprime mortgage lending, which is the practice of making loans to borrowers who do not qualify for the best market interest rates.
In Canada, there are many alternative lenders that are in the business of making a quick buck off unsuspecting borrowers. This CBC Marketplace article describes an undercover expose on alternative financial institutions such as CashMoney, Easyfinancial, Fairstone Financial and Money Mart.
While in the United States, predatory lending is often targeted towards minority groups and recent immigrants, in Canada, these types of lenders attempt to attract older adults in possession of considerable home equity yet low on income.
Lenders in Canada can charge up to 60 per cent interest, according to the Criminal Code of Canada. We cannot rely on anyone else to ensure our own financial well being. It’s upto each person to become more aware of predatory lending practices.
10 common types of predatory lending according to Deedstreet Capital
- Payday Loans
- Auto Loans
- Car Title Loans
- Balloon Payments
- Loan Flipping
- Loan Packing
- Reverse Redlining
- Negative Amortization Loans
- Asset-Based Lending
- Subprime Mortgage Lending
Although anyone can fall victim to predatory lending, certain groups are more at risk than others. These include:
- Recent immigrants
- Low-income earners and people with poor credit
- Minority groups
- Elderly people
- Single mothers
Studies in the US show that during the subprime mortgage crisis, the foreclosure rates of black and Hispanic neighborhoods were about three times higher than those of predominantly white areas.
How to avoid predatory loans
The best way to avoid predatory loans is to not borrow. But if you need to borrow money, avoid loans that have these signs:
No Credit Check: If lenders say they don’t need to check for credit history, they may be trying to take advantage of borrowers with bad credit who are desperate for financing.
High-Interest: Whenever you need a loan, check the interest rates charged at several large lending insitutions based on your credit score. If a loan costs much more than these, it’s probably a predatory loan.
Excessive Fees: In addition to high interest rates, predatory lenders often charge excessive fees including:
- Application fees
- Late payment fees
- Prepayment penalties for paying off your loan early
- Annual membership fees
- Transaction charges
- False, Misleading or Abusive Loan Terms: Predatory lenders not only charge high interest rates and fees, but they’ll also impose unfair terms that includes
- Clauses that prevent you from taking legal action if the lender mistreats you
- Unfair late payment penalties
- Additional hidden fees
High-Pressure Sales Tactics: The lender may try to rush you by saying the offer applies only for a limited time, a decision is needed immediately, or that you’re not qualified for a traditional loan and have no choice but to take their offer.
Lack of Communication: If the lender avoids your calls or gives you the run-around, that’s a sign the lender is not truthful about its products or services. In contrast, a reputable lender will be upfront and transparent about its loans, interest rates and fees.
Unsolicited Offers: Unsolicited loan offers almost always means that loan is predatory. Since the loan is not normally a desirable deal that people flock to, the lenders need to push their products on uninformed borrowers to make more money.
Empty Spaces in Documents: Predatory lenders may leave blanks in the document to later fill in terms that are not favorable to the borrower. If it’s a major loan, have an attorney or financial advisor review the documents before signing.
If it’s too easy, it’s most likely a bad deal
A lot of predatory lenders make it too easy to sign a bad deal. Just remember that good lenders never do this. Loans are contracts enforceable by law. Always make sure you learn exactly what you’re getting into before signing anything.