Must read: Guaranteed approval loans guide
Predatory lending and loan sharks: What are they and where else can you apply?
If you don't qualify for traditional loans, you have options other than loan sharks.
Borrowing from a loan shark might feel like your only option when you’re in a pinch and need cash fast. These illegal lenders have few requirements and can seem easier than going to a legit lender. But there are better alternatives out there.
What is loan sharking?
Loan sharking is deemed a criminal offence in Canada if the effective rate (including fees and penalties) exceeds 60% per annum, which works out to ~47% APR. This rule does not apply to payday loans as those are regulated differently.
Loan sharks may be attractive to some borrowers because they’re fast, informal and discreet. However, there are safer options to explore.
Predatory lending
Predatory lending is any unethical tactic a lender or loan shark uses to trick a borrower into unfair or illegal terms. Borrowers with bad credit or low income are often targeted most. In other words, people who might not be able to qualify for a loan from a bank or credit union. But even the most creditworthy customers can fall victim if they aren’t careful.
What to watch out for with predatory lenders and loan sharks
Here are some of the common ways disreputable lenders take advantage of borrowers:
- Bait-and-switch schemes. A lender tells you you’re going to get a certain rate or term in your final loan offer, then changes it to a less favourable term or rate with no good reason. This can sometimes happen months after you’ve started paying off your loan.
- Inadequate disclosure. A lender hides or misrepresents the real cost of your loan so you don’t know what you’re getting into. For example, hiding fees is a type of inadequate disclosure.
- Loan packing. A lender hides extra add-ons in your contract like loan insurance or tells you that you’re required to buy one or more add-ons to be eligible.
- Loan flipping. A lender recommends refinancing your loan with a higher rate and longer term without disclosing how it might affect your overall loan cost. You also might have to pay additional fees to refinance.
- Reverse redlining. A lender targets residents of a neighborhood with limited financial resources by charging everyone who lives there higher rates and fees regardless of their income or creditworthiness.
- Negative amortization. When a lender allows you to make monthly payments lower than the interest that adds up each month. The result? You owe much more than you originally borrowed, even after making several years of repayments.
- Hidden balloon payments. You pay off your loan for years — usually at a competitive rate — only to find that your last repayment is several times larger than your other payments. You’re left with the choice of making the balloon payment now or refinancing your loan to pay off the balloon payment.
- Equity stripping. A lender provides high-risk borrowers with loans backed by a home, car or other expensive item that they’re likely to default on. When the borrower can’t make the payments, the lender takes the collateral.
Legitimate alternatives to loan sharks
- Cash advances (easier to get)
- Personal loans (harder to get)
- Payday loans (easier to get)
Cash advance apps with lenient requirements
Get small, zero-interest loans from these cash advance providers. You pay no interest on these cash loans, but you may pay a monthly subscription fee.
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Compare personal loan providers with lenient requirements
Some lenders of personal loans can accept bad credit and low incomes. Overall, however, personal loans are harder to get than cash advances or payday loans.
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⚠️ Warning: Be cautious with payday loans
High-cost payday loans are unsustainable for borrowing over a continued period of time and are expensive as a means of longer-term borrowing. If you're experiencing financial hardship call Credit Counselling Canada for free financial counselling (Monday-Friday 8:00am-5:00pm at +1 866-398-5999). You may also want to consider payday loan alternatives. Maximum borrowing costs will vary by province. Review the maximum borrowing cost for your province before entering into a loan agreement.Compare payday loans with easy requirements
Unlike loan sharks, payday lenders are legally required to be licensed in all provinces where they operate, and they have payday loan regulations they must follow. That said, payday loans have excessively high fees and are only appropriate as an absolute last resort.
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Are payday loans predatory?
Payday loans can sometimes be useful as a last resort for emergency one-time use, but yes, they can also be predatory. These loans are extremely expensive and are typically repaid by the borrower’s next payday. When that happens, the borrower has less income left over to pay for other expenses or debts. If the borrower doesn’t have enough income left, it may force them to get another payday loan, which traps them in a cycle of debt. This can easily happen if the borrower was struggling financially to begin with – which is usually the case with payday loan users.
Also watch out for payday lenders who rush or pressure you into getting the loan.
Related: Alternatives to payday loans
What are the potential consequences of predatory lending?
First and foremost, predatory lending is expensive for the borrower. Legitimate lenders profit when a borrower makes their payments on time and lose money when they default. But predatory lenders often include terms that let them profit when a borrower can’t pay — such as charging high late fees or seizing valuable collateral like a car or house.
Not only does this cost borrowers much more than your standard term loan, but it can also destroy your credit — limiting your future options when you need a loan, want to buy a home or in some cases, need to get a job. Predatory lenders also often set borrowers up to get caught in a cycle of debt. This can lead to bankruptcy if you receive a court order to pay off a lender and aren’t able to.
8 warning signs of a predatory lender or loan shark
You know how a predatory lender can hurt you, now learn what to look out for when comparing lenders. One or two warning signs doesn’t necessarily mean a lender isn’t legit, but you might want to steer clear if you notice multiple red flags.
1. It sounds too good to be true
If it seems too good to be true, it probably is. Read your contract carefully for hidden fees and keep an eye out for sentences that seem intentionally confusing. Make sure you fully understand what you’re getting into before you sign it. And keep an eye out for exception deals. If you don’t have strong credit or a regular income coming in, but a lender guarantees you a low-interest loan with favorable rates, you might be looking at a scam.
2. The lender contacted you
Predatory lenders often use TV ads, aggressive telemarketing techniques and even door-to-door salespeople to convince you that you need a loan. If the loan wasn’t originally your idea, chances are you’re working with a lender that doesn’t have your best interest in mind. Even so, not all lender-initiated deals are scams.
3. The lender isn’t licensed in your province
Provinces require lenders to have a licence. Read up on your province’s regulations and make sure your lender is up to snuff, especially if it charges extremely high rates and fees. Check your local department of business oversight to make sure it’s registered. If it’s not, you could be dealing with a loan shark or other predatory lender.
4. The lender isn’t upfront about costs
Some lenders might be hesitant to give you information about its loan costs until they know your credit score and income. This might be a sign that their loans are expensive, though not necessarily a sign of a predatory lender.
But when a lender doesn’t want to give you details about your loan’s cost even after you’ve provided information about your personal finances, consider looking elsewhere.
5. The lender charges extra for poor credit
Your credit score typically comes into play when a lender decides which rates, fees and terms you’re eligible for. But most legitimate lenders don’t charge extra fees for having bad credit.
Others might charge you much higher rates than you’re eligible for with other lenders. You can avoid this by prequalifying with a few lenders to get a ballpark idea of what rates you should be getting.
6. You’re rushed to sign the contract
If a lender doesn’t want you to read the contract carefully, that could be a sign it’s trying to hide something. In this case, stand your ground and be extra careful when you go over your contract. A legitimate lender shouldn’t pressure you for wanting to know what you’re getting into.
7. There are blank spaces on the contract
Never sign a document that has blank spaces where a lender could potentially go back in and add clauses that you never agreed to, like right to offset clauses. Ask your lender for another copy of the contract without the blank spaces — or look for a loan somewhere else.
8. The lender requires loan insurance
Loan insurance is a legitimate product and you’ll likely get offered this especially if you’re a borrower with bad credit, but it should never be required. This is a completely optional product and the lender can’t ask you to get it in order to get approved.
Finder survey: What is the main reason Canadians from different provinces give for getting a payday loan?
| Response | Saskatchewan | Ontario | Nova Scotia | New Brunswick | Manitoba | British Columbia | Alberta |
|---|---|---|---|---|---|---|---|
| Groceries | 10% | 4.7% | 2.94% | 3.85% | 4.35% | 4.32% | 6.08% |
| Insurance (car, home, life, health, etc.) | 10% | 2.35% | 4.35% | 3.24% | 2.03% | ||
| Medical/dental emergency | 7.5% | 2.15% | 2.17% | 1.62% | 1.35% | ||
| Car repair | 5% | 5.28% | 2.17% | 3.24% | 0.68% | ||
| Emergency move or travel expenses | 5% | 2.35% | 1.62% | 0.68% | |||
| Expected travel expenses (fuel, public transit fares, etc.) | 5% | 0.98% | 2.17% | 1.62% | 0.68% | ||
| Expenses due to job loss | 5% | 1.17% | 2.17% | 1.62% | 0.68% | ||
| Gas (utility) bill | 5% | 1.96% | 3.85% | 6.52% | 0.54% | 0.68% | |
| Rent | 5% | 4.31% | 5.88% | 3.85% | 2.17% | 2.7% | 2.7% |
| Cable TV bill | 2.5% | 1.76% | 2.94% | 2.17% | 0.54% | 3.38% | |
| Car loan payment | 2.5% | 4.11% | 5.88% | 2.17% | 3.78% | 2.03% | |
| Child care expenses (daycare, school fees, clothing, etc.) | 2.5% | 0.59% | 3.85% | 2.17% | 0.54% | 1.35% | |
| Education expenses | 2.5% | 1.17% | 2.17% | 2.16% | 4.05% | ||
| Electricity bill | 2.5% | 3.33% | 2.94% | 3.85% | 2.17% | 3.24% | 2.03% |
| Home repair (broken appliance, roof damage, etc.) | 2.5% | 3.91% | 5.88% | 4.35% | 1.62% | 4.05% | |
| Internet bill | 2.5% | 2.54% | 5.88% | 3.85% | 2.17% | 1.62% | 1.35% |
| Vacation | 2.5% | 1.96% | |||||
| Water bill | 2.5% | 1.96% | 2.94% | 2.17% | 0.54% | 1.35% | |
| Phone or Mobile phone bill | 2.15% | 2.94% | 3.85% | 4.35% | 1.08% | 1.35% | |
| Entertainment | 1.96% | 2.17% | 1.08% | 1.35% | |||
| Mortgage | 1.96% | 3.78% | 3.38% | ||||
| Pet care expenses | 1.17% | 1.62% | |||||
| TV/music/media subscription | 0.78% | 0.54% | |||||
| Gifts | 0.39% | 0.54% | |||||
| Gym membership | 0.2% | 2.94% | 0.54% | 0.68% |
Source: Finder survey by Pollfish of 1013 Canadians, August 2023
Where can I get help with my debts?
If you need help with your financial situation, consider getting credit counselling. There are free credit counselling services available across Canada.
I think I’m a victim of predatory lending. What can I do?
If possible, talk to your creditor first. There’s a chance that there’s been a misunderstanding that can be quickly resolved. If you can’t, check with your province’s laws. Many — though not all — have laws against predatory lending and procedures that you can follow if your lender breaks those laws. You could potentially file a lawsuit against your lender.
You might also want to file a complaint with the consumer protection office in your province or territory. After you file a complaint, the office reaches out to the company to attempt to resolve the problem. It also uses complaints to identify lenders and practices that should have more regulation.
Bottom line
Predatory lenders and loan sharks trick borrowers into getting a loan they can’t afford. They’re particularly common with payday loans, though you can find predatory lenders of secured and unsecured personal loans, business loans, mortgages and more.
You can make sure you’re protected by knowing your province’s rules and knowing the warning signs. Also consider browsing our guide to legitimate payday loan alternatives.
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