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Predatory lending and loan sharks: What are they and where else can you apply?

If you don't qualify for traditional loans, you have options other than loan sharks.

Borrowing from a loan shark might feel like your only option when you’re in a pinch and need cash fast. These illegal lenders have few requirements and can seem easier than going to a legit lender. But there are better alternatives out there.

What is loan sharking?

Loan sharking is deemed a criminal offence in Canada if the effective rate (including fees and penalties) exceeds 60% per annum, which works out to ~47% APR. This rule does not apply to payday loans as those are regulated differently.

Loan sharks may be attractive to some borrowers because they’re fast, informal and discreet. However, there are safer options to explore.

Predator lending

Predatory lending is any unethical tactic a lender or loan shark uses to trick a borrower into unfair or illegal terms. Borrowers with bad credit or low income are often targeted most. In other words, people who might not be able to qualify for a loan from a bank or credit union. But even the most creditworthy customers can fall victim if they aren’t careful.

What to watch out for with predatory lenders and loan sharks

Here are some of the common ways disreputable lenders take advantage of borrowers:

  • Bait-and-switch schemes. A lender tells you you’re going to get a certain rate or term in your final loan offer, then changes it to a less favourable term or rate with no good reason. This can sometimes happen months after you’ve started paying off your loan.
  • Inadequate disclosure. A lender hides or misrepresents the real cost of your loan so you don’t know what you’re getting into. For example, hiding fees is a type of inadequate disclosure.
  • Loan packing. A lender hides extra add-ons in your contract like loan insurance or tells you that you’re required to buy one or more add-ons to be eligible.
  • Loan flipping. A lender recommends refinancing your loan with a higher rate and longer term without disclosing how it might affect your overall loan cost. You also might have to pay additional fees to refinance.
  • Reverse redlining. A lender targets residents of a neighborhood with limited financial resources by charging everyone who lives there higher rates and fees regardless of their income or creditworthiness.
  • Negative amortization. When a lender allows you to make monthly payments lower than the interest that adds up each month. The result? You owe much more than you originally borrowed, even after making several years of repayments.
  • Hidden balloon payments. You pay off your loan for years — usually at a competitive rate — only to find that your last repayment is several times larger than your other payments. You’re left with the choice of making the balloon payment now or refinancing your loan to pay off the balloon payment.
  • Equity stripping. A lender provides high-risk borrowers with loans backed by a home, car or other expensive item that they’re likely to default on. When the borrower can’t make the payments, the lender takes the collateral.

Legitimate alternatives to loan sharks

Cash advance apps with lenient requirements

Get small, zero-interest loans from these cash advance providers. You pay no interest on these cash loans, but you may pay a monthly subscription fee.

Loan providerInterest rateLoan amountLoan termKey features

Credit Line

0% interest and no fees to access credit, optional $11.99/month membership for premium services like instant funding$30 – $15030 days, extendableInstant approval, no credit check and funding within 30 minutes with a monthly subscription

KOHO

Cash Advance

No interest but there’s a mandatory subscription fee starting at $2/month.$20–$250FlexibleEasy application, no credit check, instant access to funds in app or via ATM

Bree

Early Pay

0% interest for cash advances but a $2.99 monthly membership fee applies, fee for express funding (varies based on advance)$20 – $350Next pay cycle (61 days max.)A fee applies if you want an instant transfer, No credit check, No late fees

Compare personal loan providers with lenient requirements

Some lenders of personal loans can accept bad credit and low incomes. Overall, however, personal loans are harder to get than cash advances or payday loans.

Loan providerInterest rateLoan amountLoan termKey features
Loans Canada

Installment Loan

8.00% - 46.96%$500–$50,0004 - 60 monthsLoan search platform, largest lender network, instant pre-approval, accepts bad credit

LoanConnect

Installment Loan

8.99% - 46.96% $500–$2,5003 - 6 monthsLoan search platform, pre-approval in 5 minutes, instant pre-approval, accepts bad credit

⚠️ Warning: Be cautious with payday loans
High-cost payday loans are unsustainable for borrowing over a continued period of time and are expensive as a means of longer-term borrowing. View payday costs and regulations by province here. If you're experiencing financial hardship call Credit Counselling Canada for free financial counselling (Monday-Friday 8:00am-5:00pm at +1 866-398-5999). You may also want to consider payday loan alternatives.

Compare payday loans with easy requirements

Unlike loan sharks, payday lenders are legally required to be licensed in all provinces where they operate, and they have payday loan regulations they must follow. That said, payday loans have excessively high fees and are only appropriate as an absolute last resort.

Loan providerInterest rateLoan amountLoan termKey features
iCash

Payday Loan

Varies by province$100 – $1,5007 - 62 days24/7 approval and e-Transfer, accepts bad credit

Cash Money

Payday Loan

Varies by province$100 – $1,5005 - 40 daysInstant approval, e-Transfer in as little as 15 mins, accepts bad credit

Maximum borrowing costs of payday loans per province
Always refer to your contract for exact repayment amounts and costs.
Province Max. cost of borrowing a $100 payday loan Cooling off period to cancel loan Max. penalty for returned cheque or pre-authorized debit
Alberta $15 2 business days $25
British Columbia $15 2 business days $20
Manitoba $17 48 hours excluding Sundays and holidays $20
New Brunswick $15 48 hours excluding Sundays and holidays $20
Newfoundland and Labrador $14 2 business days $20
Nova Scotia $15 Next business day (2 days for online loans) $40 (default penalty)
Ontario $15 2 business days $25
Prince Edward Island $15 2 business days N/A
Quebec Limit of 35% AIR N/A N/A
Saskatchewan $17 Next business day $25

Are payday loans predatory?

Payday loans can sometimes be useful as a last resort for emergency one-time use, but yes, they can also be predatory. These loans are extremely expensive and are typically repaid by the borrower’s next payday. When that happens, the borrower has less income left over to pay for other expenses or debts. If the borrower doesn’t have enough income left, it may force them to get another payday loan, which traps them in a cycle of debt. This can easily happen if the borrower was struggling financially to begin with – which is usually the case with payday loan users.

Also watch out for payday lenders who rush or pressure you into getting the loan.

What are the potential consequences of predatory lending?

First and foremost, predatory lending is expensive for the borrower. Legitimate lenders profit when a borrower makes their payments on time and lose money when they default. But predatory lenders often include terms that let them profit when a borrower can’t pay — such as charging high late fees or seizing valuable collateral like a car or house.

Not only does this cost borrowers much more than your standard term loan, but it can also destroy your credit — limiting your future options when you need a loan, want to buy a home or in some cases, need to get a job. Predatory lenders also often set borrowers up to get caught in a cycle of debt. This can lead to bankruptcy if you receive a court order to pay off a lender and aren’t able to.

8 warning signs of a predatory lender or loan shark

You know how a predatory lender can hurt you, now learn what to look out for when comparing lenders. One or two warning signs doesn’t necessarily mean a lender isn’t legit, but you might want to steer clear if you notice multiple red flags.

1. It sounds too good to be true

If it seems too good to be true, it probably is. Read your contract carefully for hidden fees and keep an eye out for sentences that seem intentionally confusing. Make sure you fully understand what you’re getting into before you sign it. And keep an eye out for exception deals. If you don’t have strong credit or a regular income coming in, but a lender guarantees you a low-interest loan with favorable rates, you might be looking at a scam.

2. The lender contacted you

Predatory lenders often use TV ads, aggressive telemarketing techniques and even door-to-door salespeople to convince you that you need a loan. If the loan wasn’t originally your idea, chances are you’re working with a lender that doesn’t have your best interest in mind. Even so, not all lender-initiated deals are scams.

3. The lender isn’t licensed in your province

Provinces require lenders to have a licence. Read up on your province’s regulations and make sure your lender is up to snuff, especially if it charges extremely high rates and fees. Check your local department of business oversight to make sure it’s registered. If it’s not, you could be dealing with a loan shark or other predatory lender.

4. The lender isn’t upfront about costs

Some lenders might be hesitant to give you information about its loan costs until they know your credit score and income. This might be a sign that their loans are expensive, though not necessarily a sign of a predatory lender.

But when a lender doesn’t want to give you details about your loan’s cost even after you’ve provided information about your personal finances, consider looking elsewhere.

5. The lender charges extra for poor credit

Your credit score typically comes into play when a lender decides which rates, fees and terms you’re eligible for. But most legitimate lenders don’t charge extra fees for having bad credit.

Others might charge you much higher rates than you’re eligible for with other lenders. You can avoid this by prequalifying with a few lenders to get a ballpark idea of what rates you should be getting.

6. You’re rushed to sign the contract

If a lender doesn’t want you to read the contract carefully, that could be a sign it’s trying to hide something. In this case, stand your ground and be extra careful when you go over your contract. A legitimate lender shouldn’t pressure you for wanting to know what you’re getting into.

7. There are blank spaces on the contract

Never sign a document that has blank spaces where a lender could potentially go back in and add clauses that you never agreed to, like right to offset clauses. Ask your lender for another copy of the contract without the blank spaces — or look for a loan somewhere else.

8. The lender requires loan insurance

Loan insurance is a legitimate product and you’ll likely get offered this especially if you’re a borrower with bad credit, but it should never be required. This is a completely optional product and the lender can’t ask you to get it in order to get approved.

Finder survey: What is the main reason Canadians from different provinces give for getting a payday loan?

ResponseSaskatchewanOntarioNova ScotiaNew BrunswickManitobaBritish ColumbiaAlberta
Groceries10%4.7%2.94%3.85%4.35%4.32%6.08%
Insurance (car, home, life, health, etc.)10%2.35%4.35%3.24%2.03%
Medical/dental emergency7.5%2.15%2.17%1.62%1.35%
Car repair5%5.28%2.17%3.24%0.68%
Emergency move or travel expenses5%2.35%1.62%0.68%
Expected travel expenses (fuel, public transit fares, etc.)5%0.98%2.17%1.62%0.68%
Expenses due to job loss5%1.17%2.17%1.62%0.68%
Gas (utility) bill5%1.96%3.85%6.52%0.54%0.68%
Rent5%4.31%5.88%3.85%2.17%2.7%2.7%
Cable TV bill2.5%1.76%2.94%2.17%0.54%3.38%
Car loan payment2.5%4.11%5.88%2.17%3.78%2.03%
Child care expenses (daycare, school fees, clothing, etc.)2.5%0.59%3.85%2.17%0.54%1.35%
Education expenses2.5%1.17%2.17%2.16%4.05%
Electricity bill2.5%3.33%2.94%3.85%2.17%3.24%2.03%
Home repair (broken appliance, roof damage, etc.)2.5%3.91%5.88%4.35%1.62%4.05%
Internet bill2.5%2.54%5.88%3.85%2.17%1.62%1.35%
Vacation2.5%1.96%
Water bill2.5%1.96%2.94%2.17%0.54%1.35%
Phone or Mobile phone bill2.15%2.94%3.85%4.35%1.08%1.35%
Entertainment1.96%2.17%1.08%1.35%
Mortgage1.96%3.78%3.38%
Pet care expenses1.17%1.62%
TV/music/media subscription0.78%0.54%
Gifts0.39%0.54%
Gym membership0.2%2.94%0.54%0.68%
Source: Finder survey by Pollfish of 1013 Canadians, August 2023

Where can I get help with my debts?

If you need help with your financial situation, consider getting credit counselling. There are free credit counselling services available across Canada.

I think I’m a victim of predatory lending. What can I do?

If possible, talk to your creditor first. There’s a chance that there’s been a misunderstanding that can be quickly resolved. If you can’t, check with your province’s laws. Many — though not all — have laws against predatory lending and procedures that you can follow if your lender breaks those laws. You could potentially file a lawsuit against your lender.

You might also want to file a complaint with the consumer protection office in your province or territory. After you file a complaint, the office reaches out to the company to attempt to resolve the problem. It also uses complaints to identify lenders and practices that should have more regulation.

Bottom line

Predatory lenders and loan sharks trick borrowers into getting a loan they can’t afford. They’re particularly common with payday loans, though you can find predatory lenders of secured and unsecured personal loans, business loans, mortgages and more.

You can make sure you’re protected by knowing your province’s rules and knowing the warning signs. Also consider browsing our guide to legitimate payday loan alternatives.

Frequently asked questions

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Written by

Publisher

Leanne Escobal is a publisher for Finder. She has spent over 11 years working with financial products and services, specializing in content and marketing. Leanne has completed the Canadian securities course (CSC®) as well as the personal lending and mortgages course by the Canadian Securities Institute. She has a Bachelor of Arts (Honours) in English literature and creative writing from Western University. See full bio

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Editor

Anna Serio was a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY. See full bio

Anna's expertise
Anna has written 63 Finder guides across topics including:
  • Personal, business, student and car loans
  • Building credit
  • Paying off debt

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