'Never again': Canadian's $4K personal loan turned into $12K 'nightmare' because of this one overlooked reason

Two years into making payments, they contacted the lender about their balance. It was reportedly just over $4,000, the same amount they had borrowed. The borrower said they were then told they had been paying for insurance they didn’t recall agreeing to.

How loan insurance can add to borrowing costs

Creditor insurance can help cover loan payments or reduce an outstanding balance in circumstances such as job loss, disability, critical illness or death. Coverage depends on the policy, and premiums add to the cost.

“Optional creditor insurance can significantly increase the overall cost of a personal loan because the premiums you pay are added on top of your loan payments,” Ali Harris-Saunders, corporate and community relations manager at the Credit Counselling Society (CCS), told Money.ca.

Harris-Saunders said borrowers should check the certificate of insurance for premiums, coverage, exclusions and eligibility requirements. They should also check whether they already have similar protection through workplace benefits or other insurance.

“If that’s the case, then creditor insurance might not even be necessary,” she said.

The borrower said they tried to stop payments while seeking an explanation, but withdrawals continued. They eventually requested a full accounting of the loan.

According to the post, the lender reported that the borrower had paid just under $9,000 but still owed roughly $4,000 to close the account. The borrower said they made four final payments of $1,000 each and described the total cost of the ordeal as $12,000.

The figures do not precisely reconcile, and the post does not establish how much of the reported cost came from insurance, interest or other charges. The total comes straight from the borrower’s own accounting, rather than an independently checked calculation.

Interest and fees can make a loan more expensive

Interest rates, repayment periods and additional fees can also drive up a loan’s total cost.

“It sounds extreme, but it usually comes down to costs stacking up,” personal finance expert and columnist Barry Choi told Money.ca. “A high interest rate combined with a long repayment term is already expensive.”

Choi said add-ons such as loan protection insurance, loan top-ups and missed-payment fees can push the cost higher. He advised borrowers to check the annual percentage rate (APR), total cost of borrowing and additional fees.

“The quick interest rate you see on ads usually doesn’t tell you the whole picture,” Choi said.

Harris-Saunders said high-interest loans and longer repayment periods can mean borrowers repay several times the original amount. Administrative, late-payment and non-sufficient funds (NSF) fees can also add to the bill.

“Borrowers should focus on the total cost of borrowing disclosed in their loan agreements, not just the monthly payment,” Harris-Saunders said.

What to check before signing a loan agreement

Before accepting a personal loan, review:

• APR and total cost of borrowing: Check the overall cost over the full term, not just the advertised rate or monthly payment.
• Fees: Look for administrative, NSF, late-payment and refinancing fees.
• Optional insurance: Confirm the premium, coverage, exclusions and eligibility requirements.
• Existing coverage: Check whether workplace benefits or another policy already provides similar protection.

The FCAC says loan insurance is optional and federally regulated financial institutions must obtain express consent before providing it. Before accepting coverage, review the certificate of insurance for premiums, coverage, exclusions and eligibility requirements.

What to do if you think you were charged for insurance without consent

Request copies of the loan agreement, certificate of insurance, consent forms and a full payment history to date. Ask the lender to explain how the insurance was authorized and how payments were allocated to principal, interest, premiums and other fees.