With COVID-19 impacting Canadian consumers and businesses financially, the Better Business Bureau cautions consumers to be wary of predatory lending. When interest rates are enticing enough to consider taking out a loan or refinancing a loan for businesses or consumers, BBB recommends researching the lender before committing any financial information.
Consumers may get involved with predatory lenders in several ways. Some lenders or brokers use frequent advertising and neighbourhood visits to encourage people to take out loans. Others target certain communities, through advertising in a specific language. They may also target neighborhoods with high numbers of elderly homeowners. Other predatory lenders may focus on small business owners without much access to credit.
Some Common Practices
- Charging excessive or unnecessary fees: Unusually high costs for mortgage or real estate brokers or for settlement services may be added to the loan without being clearly explained. These fees (often described as “points”), when added to the principal of the loan, can add thousands of dollars in unnecessary costs. Generally, if you do not have the cash to pay these fees when you take out the loan, be aware that the lender will add them to the amount borrowed. Be sure that you understand the nature and full cost of any fee before you sign any documents.
- Balloon payments: Some loans are structured so that after a short amount of time, five to 10 years, one very large payment is required to pay off the remainder of the loan. This is known as a balloon. Balloon loans may make the initial monthly payments very low, but then the amount is refinanced before the “balloon” payment is due that is typically in the hundreds or hundreds of thousands. Before agreeing to a balloon loan, ask for a copy of the proposed payment schedule and study it carefully.
- Home improvement loan fraud: BBB receives reports of a few home improvement contractors being involved as a part of predatory lending. For consumers, these contractors may canvass neighbourhoods, offering to arrange loans to finance home improvements. Homeowners may be pressured into signing these loans without adequately reviewing the terms and receiving substandard work. Be aware of anyone coming to your door with a limited-time or “special offer” — if a deal seems too good to be true, it probably is!
Don’t:
- Sign any documents with any blank lines, false or inaccurate information.
- Be rushed into signing a loan because it is a “Limited Time” offer.
- Pay up-front fees without adequate explanation.
- Do business with lenders that you haven’t checked out.
Do:
- Be very cautious about lenders or contractors who come to your door.
- Get all fees and terms explained.
- Know what your loan will cost you each month and in total.
- Review all documents or have someone you trust review them for you.
- Make sure you are comfortable with the loan terms if you have applied for a “balloon” loan.
For more consumer information: BBB.org/coronavirus.
