One of the main criteria lenders look at when determining whether or not to give you a personal loan is your credit rating. If you’re one of the many Canadians with poor or bad credit—perhaps a period of unexpected illness or unemployment left you behind on your bills or needing to declare insolvency—you’ll likely find it more difficult to get approved for a loan.
The good news is that you absolutely can still get a short term loan with bad credit, but there are a few important things to keep in mind and look out for.
What is Considered Bad Credit?
Credit scores range from 300-900 and reflect your creditworthiness to potential lenders. The higher your credit score the more options you will have at the most favourable rates. A good credit score is considered above 712. A fair credit score is considered between 660 and 712. A below average credit score is considered between 575 and 659. A bad or poor credit score is considered between 300 and 574. If your credit report shows a score below 660, it’s highly unlikely that you’ll be offered a loan from a bank or another major financial institution that’s considered an “A lender”.
If you’re not in a financial emergency and can do without the loan for now, your best course of action is likely to work on improving your credit score in order to access better credit options.
How Bad Credit Affects Borrowing
A below average or bad credit score indicates to lenders that you’re less likely to repay your loan. You may have a damaged score because you’ve missed payments, defaulted, or declared insolvency in the past. A credit history like this makes you a riskier candidate. You’ll have less options to choose from and will likely have to go with an alternative lender, such as an online lender or a subprime lender.
Subprime loans generally have higher interest rates and less favourable terms in order to compensate these lenders for taking on more risk. Higher interest rates mean that you’ll pay more in interest over the lifetime of the loan. You may also find steep penalties if you miss a payment or terms that make it costly to pay off your loan early.
Bad Credit Loan Options
If you need a loan now and are unable to qualify for one with a bank or major institution (because your credit score is below 660), you’ll have to look at alternative or private lenders, often called subprime lenders. Be extremely wary of payday lenders as they have exorbitantly high interest rates.
Alternative lenders offer both unsecured and secured bad credit personal loans. An unsecured loan doesn’t require that you put up collateral, such as a house or a car, for you to apply. A secured loan does require collateral in order to apply. If you default on a secured loan, the lender is able to seize that asset as payment for the loan. Many personal loans are unsecured, like most credit cards, but if you are unable to qualify for an unsecured loan a secured loan may be your best option.
Advantages of Bad Credit Loans in Canada
When used responsibly, a bad credit loan can give you access to a large amount of money quickly. A personal loan can help you consolidate higher interest debt, such as credit card debt, in order to lower your monthly payments and reduce the total amount you have to pay in interest.
Bad credit loans can also help you rebuild your credit score. If you make your repayments in full and on time, your score will gradually improve. If you don't currently qualify for low-interest credit cards, taking out and responsibly managing a loan can be an effective way to build credit without using credit cards. Once your credit score has improved you’ll be able to qualify for more favourable credit options, including credit cards and mortgages.
What to Look Out For
Like any significant financial decision, it’s important to do your homework before accepting a loan. When you apply for a bad credit loan through an alternative or private lender you must be fully aware of the rates, fees, and terms. You want to know exactly what you’re signing up for and understand what the worst case scenario could look like.
Bad credit loans come with higher interest rates than a loan you would get from a bank, but some rates can be truly exorbitant (as we mentioned earlier, it’s always best to avoid payday loans). If you decide to apply for a loan from an alternative lender, here are some key items to look out for:
Check the lender’s rates before applying to make sure the resulting repayment schedule fits within your budget
Check the terms and conditions of the loan for any hidden fees or penalties, such as a missed payment or prepayment penalties
Ensure that the lender reports to credit bureaus so that your loan repayments will help rebuild your credit score
The Bottom Line
If the reason you need a loan isn’t an emergency, it’s best to work to improve your credit score first so that you can get a loan with a lower rate and better terms. If you can’t wait, do your homework and shop around for a loan with the best possible terms you can find. No matter what you decide, remember that your credit score is an important part of your financial health and always worth working to improve!
Kate is a Toronto-based writer and marketing communications consultant. Kate is a Qualified Associate Finacial Planner (QAFP) is passionate about having open and honest conversations about money. She's also really into crafting: she has 3 sewing machines.