Almost 8.5 million Canadians face financial difficulties – and some of them are non-prime borrowers, which means they typically have lower credit scores and therefore higher interest rates. When a borrower is deemed risky by a lender, they typically won’t be able to qualify for loans from traditional financial institutions, like banks, ultimately forcing them to explore alternative lending options, such as online lenders.
With the rise of the internet, the number of online lenders has skyrocketed, leading to many opportunities for consumers. If you’re dealing with a legitimate lender, an online loan can be as safe as one issued by a physical bank. Unfortunately, an increasing number of unsafe online lenders – also known as predatory lenders – are also available. Eager to exploit Canadians already struggling with financial difficulties, these online lenders employ illegal and unethical business practices.
Read on to find out more about unsafe online lenders in Canada and how to protect yourself.
What Is an Unsafe Online Lender?
If you need money quickly and can’t get a traditional bank loan, many online lenders can help. They offer various options, from short-term and unsecured loans to auto and mortgage loans.
For desperate individuals, online lending is especially appealing. Its most significant benefit – streamlined digital processes – means borrowers receive funds in minutes rather than weeks. Its added convenience and accessibility of securing funds are unmatched by banks, which often require extensive paperwork and in-person appointments.
At SolveYourDebts.com, we are seeing more and more clients using unfamiliar online lenders. It’s becoming the norm to skip a meeting with your bank in favour of applying online for a loan. Over the past decade or so, banks have become inconvenient. Finding someone to speak to is difficult, appointments aren’t available for days if not weeks, and you have to wait weeks to hear back about whether or not your loan application has been successful.
But with online lenders, consumers can apply immediately and receive instanteaneous approvals. As a result, trust and loyalty with banks are dwindling and online lending options are becoming more widely used.
Of course, this can be problematic if you don’t know who you’re dealing with. Many of these online loan companies are exactly what they seem: too good to be true. In no time, borrowers may find themselves in even worse financial situations.
Unsafe and illegal online lenders often employ tactics that can include:
- High prepayment penalties
- Failing to reveal essential terms and conditions in their loan contracts
- Overly high and abusive fees not factored into the loan’s interest rate
- Unnecessary add-on products or services, like life insurance for a mortgage
- Providing loans for durations that exceed the maximum period permitted by law
- Asset-based lending and equity stripping, which jeopardizes the borrower’s home or car
- Escalating debt burden resulting from the lender’s pressure for the borrower to refinance repeatedly
- A balloon payment (a large final payment at the end of the loan term that makes monthly payments appear lower)
How To Identify an Unsafe Online Lender
Online, it’s often easy for illegal lenders to establish themselves and avoid detection by regulators.
Predatory lenders frequently target vulnerable individuals with low credit scores, limited education, and those affected by discriminatory lending practices based on race, ethnicity, age or disability. By using shady sales tactics, unsafe online lenders exploit borrowers’ lack of financial literacy, helping them take out loans they won’t be able to pay back. And if that happens, borrowers better watch out.
Unlike legitimate companies, unsafe online lenders don’t follow clear rules regarding the timing and frequency of collection calls. Instead, they often employ aggressive collection tactics – even threatening violence – to collect on their debts.
To avoid borrowing from an unsafe online lender, it’s essential to conduct thorough due diligence. Here’s what to look out for when evaluating whether an online lender is secure:
- Lack of Robust Security Measures: Non-reputable platforms don’t have security measures to protect your personal information, including encryption protocols and identity verification. They’re also non-transparent about their terms and disclosures.
- No Credit Check: Online lenders that mention you’re 100 per cent eligible for a loan indicate a scam. A legitimate lender has pre-qualifying criteria for a loan and will require your credit history.
- A Rushed Process: You should have time to thoroughly read the documentation and get clarification on any questions and concerns. If you feel any pressure to sign up for a loan, it’s a red flag.
- Request for Upfront Payment: Illegitimate lenders may request a payment upfront, citing ‘application costs.’ Remember, you need to borrow money – not pay it out before receiving your loan.
How to Identify a Safe Online Lender
Most importantly, safe online lenders won’t display any red flags described in the previous section.
Credible companies will also have a solid reputation, a social media presence, and accessible customer service. Contact details online will be clearly identifiable and consistent with the company’s claimed address.
In addition, they’ll have a secure website URL, indicated by a website address starting with ‘http’ or ‘https.’ A padlock symbol will be visible in their site’s address bar, identifying the company uses encryption. When gaining access to a safe lender’s online site or app, you’ll need to complete two-factor authentication as an extra safety measure.
Alternative Solutions for Dealing with Financial Debt
It can be hard to distinguish an unsafe or illegal online lender, which can quickly create more financial trouble.
Rather than harshly impact your financial health, consider alternatives with lower rates and more flexible repayment schedules. Both lines of credit and debt consolidation loans are potential options.
If you’re looking for more information about the credit counselling process, we can help. Get started by contacting SolveYourDebts.com today.
