While predatory lenders have always existed, the COVID-19 pandemic has, unfortunately, provided them with a variety of new clients. As many consumers continue to struggle from job loss and keeping up debt payments they can no longer afford, predatory lenders, offer something they need; easy access to funds.
How The COVID-19 Pandemic is Helping Predatory Lenders Flourish
The COVID-19 pandemic has caused financial turmoil for many Canadians. According to an ACORN study, 17% of respondents were unable to make payments due to the pandemic and as a result, have turned to high-interest loans. While many first turned to banks (40%), they were denied access to the credit they needed. This is likely due to the consumer having low income, less stable employment, ongoing expenses, and other credit problems. The lack of accessible credit for these consumers has created a surge in demand for high-interest loans. The study shows that 70% have taken payday loans and 45% have taken installment loans, which is 34% higher than the number of people taking installment loans in 2016.
Unfortunately, the APR on these loans is so high that they often lead borrowers into a cycle of debt. According to the ACORN study, 13% of respondents have reported taking these loans more than 10 times in a year. This typically happens when a borrower takes out a payday loan to make ends meet or to pay off an emergency expense. By the time their next payday arrives, they are typically still short on cash and are unable to pay off the payday loan which leads to high charges in interest and fees. This, in turn, causes the borrower to repeatedly take on new debt to cover their old debt.
Lack of Transparency
Many lenders that provide payday loans and other high-interest credit products lack financial transparency. They are often criticized for misleading interest rates and hidden fees that can make the loan unaffordable. While these costs can be found in the loan agreement, these lenders use manipulative tactics to stop borrowers from noticing. In a national report by ACORN, lenders of high-interest loans used pressure tactics to rush the borrower into signing the loan agreement (45%).
This lack of transparency extends further where borrowers are charged for optional services such as loan insurance without their consent. In fact, the study reported that 12% of borrowers were unaware of the charges until the fee was debited from their account. Considering that many of these borrowers come from low-to-mid income households and rely on these loans for day-to-day living expenses, the lack of transparency on such costs can be financially devastating for the borrower.
Consumers in need of emergency funds or those who struggle with bad credit are more often than not, rejected by their local bank. Depending on their situation and the reason for the loan, they are then forced to move on to lenders who may charge predatory interest rates, have hidden fees, or simply aren’t the right choice for their specific needs. The lack of reasonable options means consumers must make the decision to take on debt they cannot afford which will undoubtedly exacerbate any financial issues they are already experiencing.
Lack of Financial Knowledge
Oftentimes consumers lack the financial knowledge needed to make the best decision for their unique situation. Financial literacy is key when it comes to navigating the world of online lenders and high-interest rates. Unfortunately, as the COVID-19 pandemic continues, more and more consumers are unable to earn enough to afford the daily necessities of life let alone an emergency or unexpected expense. Predatory lenders rely not only on consumers who are desperate for extra funds but also on their lack of knowledge.
While the Government of Canada has created numerous financial aid programs to help consumers during this time, there are clearly many Canadians who have fallen through the cracks and are forced to rely on high-interest loans from lenders who do not have their best interests in mind. Clearly, additional government assistance is required, now more than ever. As well as alternative options that do not create cycles of debt for those in need.