In recent years, the number of payday loan scams has increased dramatically as dishonest lenders take advantage of Canadians struggling with strained budgets and crippling debts. Illegal online payday lenders sidestep consumer lending laws, engage in shady sales tactics, and aggressively pursue borrowers who fail to repay them on time. The problem is especially prevalent online, where scams are easier to set up and avoid detection by regulators.
In this article, we’ll explain how illicit payday loan companies operate and why they’re so prevalent online. More importantly, we’ll show you how to spot the red flags to avoid becoming one of their victims.
How illegal online payday lenders exploit borrowers
In a recent Statistics Canada survey, over a quarter of Canadians said they would struggle to cover an unexpected expense of $500. According to the Canadian Lender’s Association, over 8 million Canadians are considered non-prime borrowers, meaning they cannot obtain a standard loan or line of credit from a traditional banking institution.
As a result, it’s not surprising that a desperate individual might approach a payday loan lender to get the money they need for an emergency expense. In haste, they may overlook the loan’s deceptive payment terms and conditions. These are the types of people that illegal payday loan companies target.
Illegal online payday lenders employ various unlawful and unethical business practices. These include:
- Failing to disclose crucial terms and conditions in their loan contracts
- Understating the amount of interest on their loans resulted in borrowers paying higher fees than they expected to pay
- Issuing loans for periods longer than the maximum amount allowed by law
- Enticing borrowers to roll over or extend their loans (a practice prohibited in many provinces)
As a result of the deceptive tactics, a payday loan company can trick you into paying more fees and interest than legally allowed.
And if you don’t pay what you owe, they may bombard you with aggressive collection calls, perhaps every minute! The payday lender may employ shaming, threatening, and combative language to get you to pay. They may even contact your family members. Or they may call up your place of work, possibly jeopardizing your job.
Setting up a website that offers payday loans is a cinch and costs little money to manage. And it’s more challenging for the police and regulators to track down a business with only a web presence. For these reasons, many illegitimate payday lenders set up shop online.
Are online payday loans legal in Canada?
Payday loan companies are legally allowed to operate in Canada, whether they offer their services online or through a physical store. Section 347.1 of the Canadian Criminal Code permits them to conduct business across the country.
Payday lenders are regulated by the laws in the province or territory in which they reside. For example, In Ontario, a lender who issues payday loans must hold a license from the Ontario Ministry of Consumer Services. They must also abide by the laws under the Ontario Payday Loans Act.
To learn more about the payday loan laws in your region, visit the website of your jurisdiction’s Consumer Affairs Office. Becoming familiar with payday loan laws will help you determine whether a lender is legitimate.
H2: How to protect yourself from online payday loan scams
Awareness and due diligence are crucial to avoid getting scammed by payday lenders in the virtual world. Here are ten red flags to watch for when approaching a lender.
1. No proof of a valid license
All payday loan companies must hold a valid license to run their business in Canada legally. A payday lender must prominently display their licence on their website. If you can’t spot it, that’s a bad sign.
To find out if a payday loan lender is licensed, visit the Consumer Hub on the Government of Canada’s website. Your province may have an online registry that allows you to verify this information. Alternatively, you can contact your province’s Consumer Affairs Office.
Another thing you can do is ask the payday loan company to provide their business registration number. If they refuse to do so, that’s a warning sign.
2. Lack of social proof and a solid reputation
Credibility is vital for any company in the online world. An online payday loan firm with a reputation for scamming or misleading people may have numerous poor reviews on rating platforms like Trustpilot. A firm with no reviews whatsoever is equally troubling.
Another sign of social proof is for a payday loan company to be part of the Canadian Consumer Finance Association (CCFA). This organization represents and promotes the interests of the payday loan industry, so it’s unlikely an illegal lender will apply for membership.
Accessible customer service and a social media presence are other signs of a reputable company. Be wary of a payday lender that lacks both.
3. Sparse or false contact information
A legitimate lender’s website should provide easily identifiable contact details, including their corporate name, email address, phone number, and address. If little information is available, such as only a post office box number, that’s a potential red flag.
Even if all the relevant details are listed, they could be fake. Therefore, it’s wise to confirm that the company that operates from that address is the same as the one from the website details.
4. Fake online form
In this scam, the lender will ask you to complete an online form to process your loan application. But instead of granting you approval and sending you the money, they enroll you in a suspicious program.
This is simply a mechanism for extracting money from your bank account. You should never, at any point, need to join any membership program to receive your loan.
5. Illegal interest rates and loan structures
Payday lenders must obey strict rules regarding how they structure their loans, as described in their province’s Payday Loans Act.
These regulations stipulate, among other things, the amount of interest they can charge you (expressed as a fee per every $100 loaned), how long the loan can remain outstanding, and how much money they can lend you at once.
In many jurisdictions, payday lenders are prohibited from:
- Rolling over your loan (combining a new payday loan with an existing one from the same lender)
- Assigning your wages (deducting funds from your paycheque to cover a loan balance)
- Not allowing you a window of opportunity (usually one or two days after you sign the loan agreement) to cancel your loan
An illegal payday loan company will regularly flout these rules. They may charge you fees higher than the legal limit, understating the loan’s annual interest rate, or extend your payment schedule beyond what’s allowed. They may also amend the loan contract’s terms after you’ve signed it.
Here are some details about regulations governing payday lending fees and penalties. Review and crunch some numbers when you get your loan contract to see if it complies with the law.
6. Aggressive collection calls
Are you currently on the receiving end of harassing collection calls? If so, there’s a chance you’ve had the misfortune of borrowing funds from an illicit lender.
By law, payday loan companies must observe clear rules dictating when and how often they may contact you. In addition, they cannot employ threatening or intimidating language nor use excessive pressure tactics.
7. Upfront fees
Sometimes, a payday loan company will ask you to pay an upfront fee as a condition for loaning you money. However, the business is likely a scammer posing as a lawful lender in such a case. They’ll probably pocket the money and disappear if you comply with their demand.
Even if the company justifies the fee as an “administrative cost” or a form of “insurance,” they’re still prohibited by law from asking for an upfront deposit. Never make an advance payment for a payday loan.
8. No transparency regarding the loan’s terms and conditions
Payday lenders are legally obligated to provide specific details about your loan contract. These include the payment due date, the total fees charged, and the number of days the loan will be outstanding.
A lack of details in your loan contract may point to an illegal lender simply looking to extract as much money from you as possible. Naturally, they won’t be concerned with creating a valid legal document.
9. Promises of guaranteed approval
Beware of guaranteed loan offers. If a lender mentions that you’re 100% eligible for financing, that’s a big sign of a scam. No responsible and professional lender mindlessly issues loans – each performs due diligence, including a credit check, to assess the riskiness of lending funds to borrowers.
Some payday lenders have loose standards and may bypass the credit check when evaluating your application. However, you can still expect them to at least verify your income.
10. Request for bank sign-in details or other sensitive information
Be wary of payday lenders requesting sensitive details, such as your online bank account sign-in details. Never provide this information – no lender needs to have it. Your banking details should suffice.
While this is an unlikely scenario, there are cases where consumers have lodged complaints against payday loan companies asking for banking credentials.
What to do if you’ve been the victim of an illegal payday loan lender
Do you have reasons to believe the payday loan company you’re dealing with is illegitimate and employs predatory lending practices? If so, there’s not much you can do, unfortunately. Provincial government departments that oversee payday loans have limited authority to intervene in cases where the lender isn’t licensed.
However, you have no legal obligation to pay the lender any interest, only the principal. Since they don’t possess a valid license, they cannot charge you interest in the first place.
In addition, provinces have legislation that bars lenders from threatening borrowers or contacting them incessantly, so you may pursue legal action against the lender if you wish. If the harassment becomes too much to bear, contact the police or RCMP to discuss possible solutions.
Solutions for dealing with payday loan debt
You may consider getting a payday loan when you’re strapped for cash and must cover an urgent bill. It’s an easy and convenient way to get the money you need while waiting for your next paycheque.
However, you risk becoming trapped in a payday loan debt cycle that can harshly impact your financial health. If you take out too many loans at a time, the high interest fees can quickly leave you struggling to repay what you owe.
Given the financial trouble that payday loans loan can get you in, it’s worth exploring alternatives that offer lower rates and more flexible repayment schedules. Some good options are lines of credit and debt consolidation loans.
Also, get your financial house in order so you don’t have to rely on payday loans to get by. Slash your expenses, build an emergency fund, and work to improve your credit score to qualify for loans with favourable rates and terms.
Image by Gerd Altmann from Pixabay
