The current health crisis has wreaked financial havoc on many Canadians across the nation with soaring unemployment and business being shuttered. As a result of this situation, many have found themselves unable to keep up with their everyday bills. In response, they may be more inclined to take out loans to bridge the gap.
Unfortunately, many Canadians may be inadvertently getting themselves into an even worse financial situation by being bound to contracts that require them to pay extremely high-interest rates and fees on their loan that they will be unable to pay back in time.
COVID-19 has given rise to high-interest loans among Canadians, putting low- and moderate-income Canadian families in a position to repay more than they can comfortably handle.
Why Consumers Are Relying on High-Interest Loans to Make it Through The Pandemic
Payday loans are notorious for charging exorbitant interest rates for monies borrowed. But these days, more and more Canadians are turning to high-interest loans to bail them out of a financial jam.
According to a study by ACORN Canada, about 70% of respondents claim to have taken out a payday loan over the course of the COVID-19 pandemic. This is a startling number, especially considering the potential dangers of getting into a never-ending cycle of debt that payday loans can come with.
But equally surprising was the finding that about 45% of study participants claim to have taken out a high-interest installment loan. That’s a major spike from just 11% back in 2016.
Clearly, Canadians are becoming increasingly in need of financial assistance to make up for any loss of income experienced as a result of job loss of businesses shutting down amid COVID-19 safety measures.
There is certainly a jump in demand for high-interest loans, including installment loans that come with very high rates. But why exactly are Canadians taking out high-interest loans as opposed to traditional personal loans from banks that come with much more reasonable interest rates?
Unfortunately, many Canadians who approach their bank for a loan have been denied. More specifically, the ACORN study found that about 40% of Canadians who applied for a loan from their financial institution were turned down.
With few options left, many Canadians have had no choice but to take out a high-interest loan to cover their financial obligations. These types of loans may be easier to get approved for compared to low-interest loans. Given their greater level of accessibility, high-interest loans are increasingly being sought after by Canadians who feel they have no other avenue to take to help cover their bills.
In fact, the ACORN study found that 80% of respondents say they took out a high-interest loan to cover daily living expenses, including rent, groceries, hydro, and so forth.
Some respondents — about 15% — said they even went so far as to take out a car title loan to gain access to funds. These types of loans essentially require borrowers to surrender the title to their car until they’re able to repay their loan in full. In the event that they are unable to pay back their loan, they risk losing their vehicle.
The Dangers of High-Interest Loans Rising Amid COVID-19
There are plenty of issues that can arise as a result of taking out a high-interest loan to deal with financial issues amid the ongoing pandemic, including the following.
Cycle of Debt
Getting into a cycle of debt can be extremely difficult to get out of. When a person takes out a high-interest loan, they have a certain amount of time to repay the loan. Usually, these loans require the funds to be repaid within a very short period of time.
For instance, payday loans typically require repayment of the loan by the time the borrower’s next paycheck comes in, which can be as little as two weeks.
In many cases, borrowers don’t have the money to pay back the loan in full, plus interest. As such, they may take out another high-interest loan to pay back the initial loan amount.
Again, if the borrower cannot repay that second loan amount in time, they may require yet another loan to meet their obligations. The cycle continues, while the interest amount owed continues to mount, making it nearly impossible to get out of this situation without aggressive measures.
Cost of a Loan
Legitimate lenders are upfront about all the costs that come with a loan, including the interest rate, fees, and other costs. But predatory lenders purposely hide all the costs that come with a high-interest loan to lure borrowers into a contract they may not be financially equipped to handle.
According to the study, about 45% of those polled said they felt rushed into signing a loan agreement with the lender. With little time to go over the contract in detail, many borrowers are lulled into a deal that they know little about. Lenders can easily hide their fees in the fine print that borrowers simply don’t have the time to read over.
Loan insurance is just another way for predatory lenders to squeeze more money out of borrowers. Upfront payment of any kind, even if it’s labeled as “loan insurance”, should never be a requirement of a lender.
Loan insurance is designed to protect the lender in case of default, though the premiums are paid by the borrower. That said, a red flag is raised when a lender mandates full payment for loan insurance before the money is loaned out. For borrowers who are desperate for the money, they may agree to the payment without doing much homework on it.
At the same time, borrowers may also be handing over their bank information, which can provide the lender with access to all their funds in their account.
False Credit Building
Some lenders may convince borrowers that taking out a loan can help them build their credit score. While this can be true in instances involving lower-rate loans, it’s not the case with high-interest payday loans.
For starters, payday loans are not reported to credit bureaus, which means timely payments won’t show up on credit reports. Further, failure to repay the loan — which happens frequently — can result in the loan agreements being sent to a collection agency. In this case, the credit bureaus may be notified and the borrower’s credit score will suffer.
Canadians who have found themselves in a desperate financial situation may be tempted to take out a high-interest loan to make sure they have enough money to cover their bills. But this is likely not the best option as it can be fraught with potential problems.
Instead, low- and moderate-income families may be better off discussing their options with a trustworthy lender that can offer them an installment loan with a lower rate and void of any unnecessary extra charges that will inflate the overall loan amount. As always, be on the lookout for predatory lenders and never enter into an agreement without understanding your obligations.