What are the risks of instant loans in Canada?

What are instant loans?

Instant loans are exactly what they sound like: fast, easy-access loans you can apply for online and receive approval for in as little as 15 minutes. Some lenders even boast 24/7 approvals, like the financial equivalent of a drive-thru: quick, convenient, and easily accessible. Instant loans come from online lenders operating across Canada, but there are also many new international companies popping up that are more aggressive and don’t follow Canadian rules for quick loans. These loans typically require minimal documentation—sometimes only a soft credit check. While that may make approval easier, it can also be misleading. A soft check doesn’t impact your credit score—but falling behind on payments definitely will.

Most instant loans carry high interest rates—often 20% or more—and many are simply payday loans under another name. Payday loan levels of interest can leave you paying a lot more than you borrowed, especially when you include fees and short repayment windows.

What are the risks of instant loans?

Instant loans have many risks, the biggest being that they’re unregulated. This means that the terms and conditions are completely different from company to company. You should never take on debt or accept a loan without reading all the fine print and understanding the terms.

Here are some risks instant loan borrowers in Canada commonly face:

• High interest rates: Even “non-payday” instant loans often start at 20% interest or higher, and some charge biweekly compounding interest, which makes the real cost of the loan much higher. When interest compounds that often, your balance can snowball faster than you expect, sometimes reaching rates of over 300% annually!

• Layered fees and interest: On top of the high interest rates, instant loan companies pile on fees to get even more money. The initial processing fee can be upwards of 10% of the amount borrowed, and that doesn’t include any potential late fees or additional costs that can be added if you fall behind.

• Unpredictable payment timelines: Some instant loans have short repayment windows before you start incurring fees and additional interest. On the other hand, some have minimum repayment windows where they prevent you from fully paying off the loan for six months or more, guaranteeing they collect interest during that period.

• Credit checks: Some lenders use soft checks, which don’t affect your credit score, but others use hard inquiries. Multiple hard inquiries within a short period can lower your credit score, especially if you apply with several lenders hoping one will approve you.

• Personal data concerns: Applying for a loan often means handing over a lot of your personal information like your name, home address, bank details, and even your SIN. With new lenders popping up constantly, it can be difficult to know whether your information is being stored and protected.

• Aggressive collection practices: When you fall behind, instant loan companies often pursue repayment far more aggressively than traditional lenders. Some are newer to Canda and may not follow Canadian regulations around collection calls or consumer rights. In some cases, these lenders might contact your family, friends, and even your employers to put more pressure on you.

What should you use instead of instant loans?

If possible, work on building an emergency fund. Even if you can only afford to put aside a small amount each month, it can build up and make a difference when you need the money.

It might also be worth reaching out to family or friends for help, or even putting the amount on a lower interest credit card and paying it off aggressively.

"Instant loans and payday loans are never a good idea. They only create a cycle of high interest debt that is hard to break out of. If you’re in a situation where you’re considering these types of loans, then you’re likely already at the stage where a consumer proposal or bankruptcy would be beneficial for you."
- Frank Fabiano, Licensed Insolvency Trustee, Grant Thornton Limited

How do you pay off your instant loans?

If your instant loan has spiraled beyond your control, you still have options. Instant loans are considered unsecured debt, which means they can be included in a consumer proposal or bankruptcy. Both solutions stop interest and collection actions, but they can only be administered through a Licensed Insolvency Trustee (LIT). If your debt feels unmanageable, talking to a LIT can help you understand your options and take back control. Book a free consultation to find out your options.