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Canadian Subprime Lenders

In Canada, subprime lending refers to diverse lending practices such as tax rebate loans, internet lending, vehicle financing, payday loans, subprime mortgages, cheque cashing, rent-to-own financing, and pawnbrokers.

What is a subprime lender?

The term “sub-prime lender” is not as popular in Canada because the country’s real estate market is relatively calm and well-regulated, despite the perturbations of the mortgage crisis that started in USA and evolved in a global financial crisis. In most general terms, a sub-prime lender targets Canadian citizens with a bad credit score, offering them consumer and mortgage loans at a very high interest rate. The high rate, together with other servicing fees, reflects the risks involved in lending to borrowers with irregular and inconsistent income. In most cases, subprime lenders offer mortgage loans to high-risk borrowers such as immigrants, elderly citizens, financially handicapped people, problematic payers, etc. The subprime lender’s clientele consist of people who will have trouble applying for a loan with a prime lender.

Why should you stay away from subprime lenders?

Frankly speaking, subprime lenders are the sharks on the mortgage loan market. They catch their clients on promises of a super-high mortgage loan, often times promising to give more money than your property is actually worth. They may also offer super low interest rate and service fee for the first year, no down-payment and minimum paperwork required. Naturally, the mortgage heaven turns into hell as soon as you nibble at the bait. After the first year of financial tranquility, the clients of subprime lenders usually find themselves with a two-digit interest rate and annual service fees on their mortgage loans. In addition, with the calming of the real estate market in the USA and Canada over the past few months, victims of subprime lenders can no longer rely on the increasing value of their property, so they apply for refinancing with a prime lender, saving them from the claws of the subprime one.

Payday Lending

Payday lending refers to the practice of extending a short-term loan against the customer’s regular income. This service has made the fastest growth in subprime lending. Payday lenders have the highest interest rates on loan products. The high borrowing costs are typically disguised in the form of brokerage and convenience charges, processing fees, and collection fees.

Subprime Consumer Financing

Consumer financing includes various lending practices including auto loans, personal loans, financing for the purchase of appliances, furniture, and electronics. Canadian banks have also entered the subprime lending industry by purchasing consumer financing companies.

An alarming tendency

Canada’s real property market watchdogs are ringing an alarming bell: more than fifty percent of the foreclosure proceedings in the country in 2008 were initiated by subprime lenders. They had targeted high-risk borrowers with a credit score well below the average for the country. The problem of subprime lending has already become a major concern for the regional and federal authorities in Canada. Only two or three years ago, the country was considered an island of financial calmness and stability. Which is even more disturbing, Canada’s government agencies are somehow reluctant to publish facts and figures about the high risk lending practices.

It logically follows that you have to stay away from subprime lenders as much as possible: their ultimate goal is to take possession of your property and sell it for an easy profit. Subprime loans may easily initiate a cycle of debt, with borrowers being unable to cover their monthly payments. Borrowers keep on borrowing at higher interest rate and risk defaulting on their loans. Debt cycles increase one’s financial vulnerability in case of job loss, emergencies, and economic shocks.