In today’s society, financial debt is an unavoidable way of life. Loans help the average Canadian maintain a good credit score, pay for school, finance a vehicle, and purchase a home. They’re also helping more and more Canadians stay afloat during rocky economic times. But that doesn’t mean loans aren’t without risks, and the biggest risk of all is who you choose to borrow from.
How extreme is the risk? Just take a peek at the numbers: Each year, Canadians lose an average of $100M dollars to scammers, but because only about 5% of victims come forward to report the crime, the Better Business Bureau estimates the real number is likely in the billions.
Bottom line: Scams are big business in Canada, and loan fraud represents a significant piece of that billion-dollar pie.
Common types of loan scams
When you’re desperate, loan fraud can be a hard thing to protect yourself against. A good rule of thumb is to be wary of the most common types of loan scams that victimize tens of thousands of Canadians each year.
Personal loan scams:
Personal loans are extremely popular (a recent study from Finder estimates that 65% of Canadians have taken out a personal loan at some point) and for good reason—they’re an effective way to help finance everything from a new car to a wedding, or even to consolidate and better manage your debt.
They’re also one of the most common sources of loan fraud around. Luckily, there are some simple signs to look out for. If you see any of these warning signs from your personal loan lender, you could be dealing with a scammer:
- They don’t require a credit check
- They offer guaranteed approval
- They aren’t registered in your province or territory
- You can’t find a physical address or contact information
(Please Note: Credit builder loans are an exception. Since the lender is not taking on any risk, this type of loan is normally guaranteed and does not require a credit check.)
Payday loan scams:
When you’re in a pinch, a payday loan can be pretty enticing. And while they’re not all scams, you can file them all under the “loans to avoid” column. Even when they’re legitimate, these types of loans have such high interest they’re notorious for trapping users in a cycle of debt that’s extremely difficult to escape.
Payday loan scams come in a few varieties. Most commonly, the lender will ask for an upfront fee before approving your loan, then disappear after you’ve sent your money. This is against the law in Canada, and legitimate lenders will never ask for an upfront fee (although some may charge you a fee after you’ve received your loan funds—this is completely legitimate).
Student loan scams:
Student debt is a serious problem in Canada. Collectively, Canadians owe more than $28 billion in student loans, and it takes borrowers an average of 15 years to fully pay off debt from their days as a student. This can have a serious impact on someone’s ability to get a mortgage or start a family.
So it’s no surprise that more and more scammers are preying on this situation. If you fall victim to one of these student loan scams, you can land in serious financial hardship. Typically, you’ll receive a phone call from a lender offering to lower or even eliminate your remaining student debt… for a one-time fee.
At best, you’ll lose your one-time fee and never hear from the scammer again. But sometimes these scammers will also change your personal information with the National Student Loans Service Centre, so you don’t receive past-due notices and warnings. Eventually, the debt falls into default and be sent to collections, an outcome which can have devastating consequences for your credit score.
Advance fee loan scams:
In general, beware of any lender asking for an upfront fee or advance fee. In Canada, lenders aren’t allowed to ask for an upfront fee before giving a loan. It’s against the law. Scammers who specialize in this type of fraud disappear the moment you’ve digitally transferred them your advance fee, and you’ll never receive your loan.
This is distinct from credit builder loans, which are entirely legitimate. With a credit builder loan, the lender agrees to loan you a dollar amount you can’t access until you’ve finished paying it off in full. This type of loan is designed to help someone with poor or no credit to build their credit history.
How to identify and report loan scams
If you’re in the market for a loan, it’s important to be vigilant and keep your guard up against potential lenders before you agree to anything. If you see any red flags while you’re comparison shopping, follow your instincts and steer clear.
How to tell a fake loan company
While the specific details of a loan scam vary from scam to scam, predatory lenders all share some of the same traits that should be major warning signs to borrowers.
We might sound like a broken record, but the biggest red flag of them all is if a lender asks for an upfront fee. As we’ve already seen, this is illegal in Canada, so this is a cut and dry sign you’re dealing with a predatory lender.
Other signs to look for in a fake loan company
- The lender is pressuring you to act fast and sign before it’s too late
- The lender doesn’t care about how much money you make
- You can’t talk to a real person, even if you want to
- The loan offer doesn’t contain complete information, such as the total cost with interest
- You can’t find a physical address for the lender
How to report loan scams
If you’ve fallen victim to a loan scam, or think you’ve identified a predatory lender, it’s your responsibility to report it and help protect others from becoming victims.
- You can report a loan scam to the Canadian Anti-Fraud Centre by phone or online.
- You can also report the scam to the Better Business Bureau through their online Scam Tracker.
How to protect yourself from loan scams
Of course, everything we’ve talked about in this article will only help protect you from the majority of scams. Unfortunately, scammers are being more and more sophisticated every day, and are finding new ways to appear more legitimate. In other words, you may not see any obvious warning signs and still fall victim to a loan scam.
To better protect yourself, here’s a few handy tips to follow when you’re assessing whether to accept or decline a loan offer.
Tip 1: Do your research.
Google is your friend. Check to see if the lender is registered in your province or territory. If you get a call from a loan company, verify their identity on Google and call the number listed to validate who is actually calling you before sending over information.
Tip 2: Just because it looks official, doesn’t mean it is.
Professional-looking websites are easier than ever to make, with little to no coding skills required. And documents are easy to copy or fake entire, including contracts. Don’t be fooled into thinking something is legitimate just because it looks official.
Tip 3: Read the contract.
The loan offer contract you receive from the lender might be dense and difficult to read, but take the time to comb through it. Make sure you understand all of the agreements and try to ascertain if any key information is missing or inaccurate. Remember, scammers may be using documents they’ve copied from another company.
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