Regular headlines appear in publications and news media identifying the consumer debt crisis in Canada. The last statistic I recall reading stated that the average Canadian has roughly $27,000 in consumer debt. As I'm well aware, this is a viscous cycle to correct. Could it be that consumers aren't savvy, or should some of the blame be shared with the predatory practices by Canadian lenders?
Driving through the main corridor of Victoria, one will see numerous payday loan offices. I imagine other cities are no different. While these offices can provide a benefit to individuals who haven't had the opportunity to build credit and need alternate lending solutions, they wreak havoc on many who frequent them in hopes of short-term borrowing or payday loans.
Many refer to Money Mart and Cash Money as predatory lenders. I wanted to get a sense of what constitutes predatory lending, and why it gets labelled as such.
The first definition I found outlined the following as predatory lending:
Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn't need, doesn't want or can't afford.
While payday loans offices, seem to get the brunt of this label, Canada's big banks have also been 'outed' as using deceptive practices in an effort to reach sales targets. Here are only some of the recent headlines:
My own experiences with car dealerships, mortgage negotiations, and banks leave me guarded and suspicious. Having become more familiar with the 'official' definition of predatory lending, I feel there is a much broader net needed to encompass all the entities that leverage predatory practices.
Here are some tips to ensure you are fully informed of any borrowing decisions you make in the future:
- What is the interest rate? This is relatively simple, but having a sense of the interest rate will help you when comparing to other products and gaining an understanding of what the borrowing is costing you.
- What is the compounding period? Interest can be compounded daily, weekly, monthly and annually. The longer the compounding period, the better.
- Is there an introductory rate? If so, what are the rates and the terms beyond the introductory period? Many lenders 'bait' consumers with great introductory terms and conditions.
- What happens if you miss a payment? Understanding the worst-case scenario is important. No one anticipates missing a payment for anything, but should you, you don't want an unfortunate surprise.
- Ensure that aside from interest, there are no other fees or charges you need to be aware of. A good example of this are lines of credit. At RBC, I secure my interest rate, then ensure they DON'T include their 'loan protector' insurance - which they agree. However, once the LOC is set-up, they always 'forget' to remove this extra insurance.