There are a lot of situations which entangle the drop of credit score and worsening credit history. Yet, people still may need to borrow funds to improve their financial situation. Bad credit loans in Canada are such a solution helping borrowers to obtain financing without excellent credit history. Paying them accurately and on time can even improve the borrower's credit score and allow them to apply for better loan terms.
Here, you will learn about bad credit loans in Canada and how to borrow wisely.
What is a bad credit loan?
When people, regardless of the cause, have a very low credit score and bad credit history, financial institutions or other lenders treat them as high-risk applicants, as there is less confidence that they will return the capital that has been lent. Therefore, such borrowers usually opt for bad credit loans, which refer to loans with low amounts, high interest rates, and rigid payment programs. These loans can require hard credit checks, but the lender won't reject your request just because of the bad credit.
Pros and cons of bad credit loans
The benefits of such loans are simple approval requirements are:
Faster application process;
An option to apply online;
No need to provide a credit report when applying;
The possible improvement of credit score when making payments for a loan responsibly. You then can receive money for emergency expenses more easily.
The disadvantages of bad credit loans are:
Higher interest rates;
Fees and penalties;
Smaller loan amounts and more restrictive repayment terms;
More potential scams, frauds, and predatory rates.
Also, failure to comply may cause penalties, additional interest, and collateral loss.
What is a bad credit score?
In Canada, credit score ranges from 300 to 900 and is ranked from poor to excellent:
741–900 is "excellent". This is the highest rank. With this credit score, applicants will have access to the highest credit limits, lowest interest rates, fastest approvals, and the advantages of premium credit cards.
690–740 "very good". At this level of credit score, lenders treat borrowers as reliable and grant them access to reasonable interest rates and more exclusive credit cards.
660–689 "good". When a borrower's credit score reaches this stage, lenders consider it a moderate risk so that such clients will be excluded from the best rates.
575–659 "fair". Applicants with this credit score will probably have high-interest rates added.
300-574 "poor". A low credit score will negatively affect credit history, and applicants will have problems getting approved for a standard loan or a credit card. To do this, the borrower can correct his score or explore other options, such as bad credit loans.
A credit score of 600 or less is generally considered a bad credit score, and sometimes lenders call it poor credit. And if the applicant's credit score is low, he can still be eligible for a loan, but the terms and interest rates may not be convenient.
Credit reporting agencies give such credit scores to people who have ever been refused a loan or a credit card, declared bankruptcy, or failed to make a monthly payment on a debt. Still, when bad credit loans are managed properly, they can help improve the credit score and meet financial goals.
Major types of bad credit loans
There are four types of bad credit loans available in Canada with different interest rates, loan terms, and loan amounts:
Unsecured personal loans for bad credit
Unsecured loans are a type of personal loan granted providing no kind of collateral. That is why the financial institution that originates a loan determines the frequency of monthly payments. Therefore, non-compliance with payments may lead to fines and a possible increase in the interest rate. An unsecured loan usually implies a higher interest rate and repayment in installments. Also, proof of a stable source of income should be provided.
When searching for bad credit loans in Canada, you can find the term "installment loan". An installment loan is a type of unsecured personal loan designed specifically for people with fair or bad credit. It has higher rates and more lenient eligibility requirements.
To qualify for such type of bad credit loan, an applicant should be the age of majority in a certain province or territory (18 or 19); be a Canadian citizen or resident; meet the minimum income, and meet the minimum credit score. APR for unsecured loans is 18-47%, the loan term is six months to five years, and the loan amount is $500 to $15,000.
Bad credit payday loans
Payday loan usually stands for a high-cost, short-term small loan for $1,500 or less, which is normally due on the next payday. Payday loans have APRs in the triple digits. That is why you should only consider resorting to such loans in case of urgent, unexpected expenses.
Moreover, payday loan terms can differ from one province to another. For example, payday lenders can not extend or roll over payday loans in Ontario, Nova Scotia, and Saskatchewan.
To be eligible for such short-term loans, the applicant should be the age of majority in a certain province or territory (18 or 19), be a Canadian citizen or resident, have a recurring income.
Secured loans: home equity loans, bad credit car title loans
People with poor credit have an option to use a home or another property as collateral when taking out a loan and guarantee the repayment with its value. This means that if customers borrow money and do not repay the debt, the lender can keep a house to cover the payment.
In case of bad credit car title loans, a vehicle is used as collateral. A borrower can continue to use his car, but if he defaults on his loan, the lender could repossess it. The eligibility criteria here are the same as for unsecured loans. Also, the borrower needs to submit the house or a car for appraisal. APR for such loans is 10%-29%, loan term — 5-10 years, loan amount — up to $75,000.
Credit builder loan
Such loans can help borrowers to improve their credit history. With credit-builder loans or cash-secured savings loans, clients don't receive the loan amount until after they pay off the loan. If clients stop making payments, the lender can keep the loan money or a portion of it. But if payments are made on time, the lender will report it to the credit bureau, and the borrower's credit score can improve. Credit-building loans charge interest and fees too. APRs usually range from 6% to 16%.
How to choose a lender?
The financial institutions which provide bad credit loans in Canada are traditional lenders, like a bank or credit union. Also, there is an opportunity to choose from online loans, as online direct lenders make it easier to apply from anywhere in Canada, and generally, it is easier to qualify.
An online lender is a good choice for people with financial difficulties, currently receiving employment insurance, or with poor credit. However, people with bad credit are most at risk for different types of scams. That is why it is important to learn how to check if loan companies, whether they are traditional lenders or online companies, are legitimate and avoid being a victim of fraud. These are common signs of a potential loan scam.
The first sign is no physical address of the lender. Fraudulent businesses usually do not provide the address to avoid legal repercussions.
The second sign is no active license. The Money Lending Act states that no money lender shall carry on the business of money-lending except in the area for which it has been granted a license.
The third sign of scum is a lender's unwillingness to disclose all their fees and penalties. Reputable financial organizations are transparent.
The next thing that should be alarming is a lender's requirement to pay upfront or to use a prepaid card. A reputable lender won't require money upfront to receive your loan proceeds.
Also, remember that no lender can guarantee the loan at once without making any checks. Even in the case of a bad credit loan lender may not make a credit check, but it will definitely investigate things like income, employment information, and education before offering a loan.
The following common sign of scum is offering a "best personal loan" for clients with bad credit with too good conditions. If the interest rate is extremely low and the loan amount for people with poor credit is too high, it can easily be a fraud.
Pay attention to the lender's behavior. If the lender calls, writes on email and even knocks on the client's door to pressure them to act immediately, it is enough reason to abandon such a deal.
How to apply for bad credit loans?
The loan application process in Canada can be divided into four main steps. The necessary documents, approval process, and credit check are the same as for the loans with better credit scores.
Complete the application
Visit the website of the entity to which you have chosen to apply or its physical office and fulfill the form. This process should take no more than 1-5 minutes. You will be asked to provide basic personal information, employment information, and financial information.
Gather all the required documents
After submitting the information, you need to collect all the necessary documents. While some lenders may have additional requirements, below are some of the basic documents and eligibility requirements that most lenders will request during the loan application process.
Stable income;
Active current account;
Age of majority in your province;
Valid Canadian address;
Canadian citizenship (or permanent residence);
Specific credit score requirements;
Social security number;
Proof of address;
Valid government-issued ID;
Proof of employment;
Bank statements;
Co-signer or guarantor.
Waite for the approval
This step is important for those who are looking for a quick approval. Once you have submitted your application, you will need to wait to receive news from the entity that will originate the loan. Depending on the lender, you can receive a call, an email, or even a text message. Check them so that you don't miss any communication with them.
On average, you should receive a response from the lender within 48 hours. It is an important matter to keep in mind that this varies from entity to entity. If you have doubts about the status of your loan application, you can always contact the lender.
The quickest providers of payday loans can fund and approve loans as soon as the same day you apply. Many other lenders offer funding within 2 - 3 business days.
If your application is rejected, you will need to restart the process with another lender.
Receive funds
Once approved, you will receive your funds. Depending on the lender, it should take no more than one business day. Most entities transfer the money directly to your bank account, but some may offer the option of receiving a check.
Ways to pay back bad credit loans
Once the borrower has received funds, the next step is to create a proper payment plan. The repayment schedule is set, and it is important to know what to expect when paying off a loan.
These are the options to pay back bad credit loans:
Most lenders require automatic loan payments to be deducted from the borrower's account. This is a good option, as there is no need to remember to make payments on time. It helps to avoid late payment fees. However, it is also important to make sure that there are the necessary funds in the bank account. If the payment fails, the lender and the bank can charge an insufficient funds fee.
If you know you will not have the necessary funds in your account to make a payment, you should contact your lender before they try to withdraw the payment. They will likely be able to help you and reschedule the payment, but if you don't reach out, they may not be as willing to help you after your payment fails.
Making all payments on time is important, but there is always the possibility of paying off your loan ahead of schedule. Some lenders will allow you to contribute a large one-time payment to pay off your balance faster. But do not forget that some lenders can impose a prepayment fee (usually in the case of a loan with a fixed interest rate).
Legal regulations of bad credit loans
According to the Government of Canada, Federally regulated financial institutions (FRFI) must provide you with certain important information about your personal loan in your loan agreement or along with it.
The Financial Consumer Agency of Canada (FCAC) monitors and supervises financial institutions and external complaints bodies that are regulated at the federal level. If you feel that an FRFI does not respect your rights, contact the Financial Consumer Agency of Canada.
The true cost of bad credit loans
When thinking of applying for a bad credit loan, it is important to consider all the hidden fees associated with it. Certain costs, such as any unexpected fees, may affect the borrower's ability to repay the loan or may change the amount you can apply for.
Interest rate. All lenders charge interest. It is the main cost of loans. Interest rates vary from entity to entity, but in Canada, the maximum rate that can be charged is 60%. However, customers with low credit scores usually appeal to private lenders and online loan companies who can even offer a three-digit annual percentage rate.
Fees. Depending on the type of loan you are applying for, you may have to pay a number of fees. Some of the most common fees are late payment fee and prepayment fee for personal loans; vehicle searches and late payment fees for car loans; origination fees, application fees, and others.
Make sure you have read and understood your loan agreement clearly before signing it.
Installment or down payment. It is the initial payment that is made when buying an asset, such as a house or a car. It is usually a percentage of the purchase price of the asset. Therefore, the down payment depends on what the applicant wants to buy.
Monthly payments. Most loans are repaid in installments distributed over the term of the loan. Usually, the borrower has the opportunity to choose between monthly, weekly, or biweekly payments. However, you should keep in mind that not all lenders offer all these options.
Most lenders provide customers with the final cost of a loan. But if not, it is always a good idea to ask in order to plan the financial future properly.
