Loans for Bad Credit in Canada
What You Should Know
- You’ll need a bad credit loan if your credit score falls below 660.
- The interest rates typically exceed 19% and the term lengths are shorter.
- Using a secured loan should improve the conditions of your loan, such as the interest rate.
- The three alternatives are RRSP withdrawal, home equity loans, or borrowing from family.
Having a bad credit score means less access to loans. While a good credit score exceeds 660, a bad credit score falls below 600. Fortunately, options are still available for those who need financing and have poor credit in Canada.
Although these loans may come with higher interest rates than traditional loans, they provide access to the money you need when other lenders don't approve your application.
Depending on the loan type and lender, you can find various loan amounts and repayment terms that fit your needs. As shown on the table below, you can expect typical repayment periods of nine to 36 months. Additionally, interest rates typically exceed 19% and approach 40% or higher with payday lenders.
This guide will discuss the five types of bad credit loans in Canada and tips for finding the best deal for borrowers with less-than-perfect credit scores.
Most Popular Loans for Bad Credit
| Lender | Funding Amount | Term length | Number of Employees | ||
| 18.99%* | $1,500 | Up to 18 months | 137 | ||
| 19.90% - 45.90% | $1,000 - $5,000 | 6 - 36 months | N/A** | ||
| 19.99% - 34.99% | $500 - $12,500 | 12 - 60 months | N/A** (Part of CanCap Group) | N/A** | |
| 19.99% - 46.80% | $1,500 - $20,000 | 12 - 60 months | 8 | ||
| 19.99% - 46.93% | Up to $15,000 | N/A | N/A** | ||
| 29.90% or 46.90% | $1,000 - $15,000 | 12 - 60 months | 18 | ||
| 29.99% - 46.96% | $500 to $15,000 | 9 - 60 months | 288 | ||
| 29.99% - 46.96% | $500 - $20,000 | 9 - 84 months | 785 | ||
| 43.00% | $2,000 - $10,000 | 12 - 60 months | N/A** |
*To qualify for the evergreen loan from Spring Financial, you must spend 12 months completing a foundational borrowing program.
**This information could not be found online or the source is uncertain.
| Advantages | Disadvantages |
| Accessibility with poor credit | Higher interest rates |
| Rapid funding | Shorter term length |
| Increase credit score | Vague charges |
Advantages
- Accessibility with poor credit: Conventional lenders avoid clients with low credit scores. If you have a less-than-ideal score, these lenders will provide you with a financing opportunity.
- Rapid funding: Bad credit loans have faster funding speeds than traditional loans. In some cases, you can receive funding in hours.
- Increase credit score: Frequently making payments on time will improve your credit score. Eventually, you'll have access to lower-interest-rate loans and healthier financial habits.
Disadvantages
- Higher interest rates: Borrowers are charged higher interest rates due to increased lender risk. As a result, the overall cost of the loan will be more expensive than loans to borrowers with good credit scores.
- Shorter term length: Loans for bad credit generally have shorter payback periods. This will result in higher monthly payments than a loan with a more extended payback period.
- Vague charges: In addition to the higher interest rate, these loans typically have additional fees that are difficult to understand. Borrowers need to be extra careful to avoid predatory lending practices.
The Five Types of Bad Credit Loans
A few different types of loans are available for borrowers with bad credit. Borrowers typically use these loans to consolidate debt, buy a car, or finance home repairs. While there are five types of bad credit loans, they fit into two categories;
- Secured Loan: These loans use collateral, such as a house or car. These have higher borrower risk but lower interest rates.
- Unsecured Loans: These loans don’t have collateral. There is higher lender risk, so they are more prudent in the application process. Additionally, the interest rate is typically higher.
This section will discuss the five main types of bad credit loans and their implications.
- Interest rate: 19.99% +
- Funding amount: $100 - $5,000
- Term length: 1 month - 5 years
Personal loans for bad credit can either be secured or unsecured. These are the most popular options due to their comparatively lower interest rates and widespread accessibility. While the lending conditions vary by lender, it's standard practice that secured loans should have lower interest rates, higher funding amounts, and longer term lengths. There are also different types of personal loans:
- Line of credit: A credit balance which you can withdraw from and repay as needed. You'll only need to pay interest on withdrawn amounts. As such, they are popular for emergency funds and borrowers who prefer flexibility.
- Installment loans: Receive a lump sum upfront that will begin accruing interest. They are repaid in regular installments over a set period. As such, they are popular with borrowers who prefer predictability.
Example Personal Lenders for Bad Credit
- Mogo
- Spring
- Easy Financial
- Interest rate: 40% +
- Funding amount: $100 - $1,500
- Term length: 2 - 4 weeks
Payday loans are designed to provide emergency funding to cover expenses until your next payday. As a result, they have short term lengths and quick funding speeds. Additionally, they are traditionally easier to qualify for, making them a popular bad credit loan.
These loans can have interest rates of up to 300% or more, and the fees for these loans can be expensive. It's generally recommended to avoid payday loans due to predatory lending practices. While only some payday lenders are predatory, it's often difficult to tell without financial knowledge. This is why there are no recommended lenders below this section.
If necessary, a payday loan must be treated as a last-resort financing option. You should consider borrowing from friends or family before taking a payday loan.
Example Payday Lenders
- Cash 4 You
- Money Mart
- Cash Money
- Auto loan interest rate: 11.99% - 29.99%
- Car title loan Interest rate: 34.16% +
- Funding amount: $1,000 - $10,000
- Term length: 1 - 60 months
Car loans are secured loans that use your vehicle as collateral. This means missing payments can result in the seizure of your car. There are two types of car loans depending if you already own a vehicle or are looking to finance a new one.
- Auto loans are designed for individuals who want a new car. This option has lower interest rates than title loans. Auto loans are available through online lenders, credit unions, and directly through car dealers. These loans typically have rates from 11.99% - 29.99%.
- Car title loans allow individuals to borrow against their existing car. Typically, you must own the vehicle outright to receive a title loan. Additionally, the car must generally be less than five years old. While criteria varies by lender, this option typically has very high interest rates. The lenders sampled had rates from 34.16% to 64.86%.
Example Auto Lenders
- Cars Fast
- Canada Drives
- Car Loans Canada
Example Car Title Lenders
- Title Loans Online
- Canadian Title Store
- BHM Financial Group
- Interest rate: 19.80% +
- Funding amount: $500 - $5,000
- Term length: N/A
If you already have a credit card, you can use it to access funds. Credit cards provide a convenient way to borrow money. Some options also have features that allow you to earn rewards or cash back. However, it is essential to note that some of these cards may also come with an annual fee and a high interest rate.
If you still need a good credit score, you may have a tough time qualifying for one. While there are credit cards for bad credit, these are typically secured cards which require you to pay a deposit. This makes it challenging to receive funding if you're in a pinch.
As you build up a credit score, you can qualify for balance transfer cards, which provide promotional low interest rates. This option allows you to leverage a temporarily lower interest rate while you rebuild your financial foundation. Balance transfer rates can be as low as 0% for a few months.
Example Credit Cards for Bad Credit
- Capital One Guaranteed Mastercard (Unsecured)
- Private lender interest rate: 10.00% +
- B lender interest rate: 6.09% +
- Funding amount: Varies
- Term length: 6 - 36 months
Mortgages are secured loans used to purchase a house or property. Mortgages usually require a long-term commitment and a good credit score. However, there are loans available for people with bad credit through private and B lenders.
- Private Mortgage Lenders are more likely to approve you for a mortgage but have less favourable lending criteria. For example, Interest rate APRs commonly exceed 10% as of February 2, 2022. Additionally, you’ll need a minimum down payment of 20% to 35%. Finally, private lenders have very short term lengths ranging from 6 to 12 months. This means that you’ll need to refinance at the end of your term.
- B Lenders provide mortgages to applicants who are just below the creditworthiness requirements of the big banks. Maybe your debt service ratios are too high or your credit score is a little too low. They are more selective than private mortgage lenders but have better conditions. For example, interest rates are just above 6% as of February 2, 2022. Their rates are typically 0.5% to 2% higher than prime lenders. These typically have one to three-year terms which you’ll have to refinance after.
Example Private Mortgage Lenders
- Nuborrow
- Alpine Credits
- Clover Mortgage
Example Mortgage B Lenders
- MCAP
- First National
- Merix Financial
Requirements to Get a Loan for Bad Credit
Lenders will rely more on your income to qualify for a loan with a bad credit score. Having a steady source of income can help you negotiate a lower interest rate. In addition, they will also assess your debt service ratios to determine how much debt you have. A higher percentage is riskier because it implies that more of your income is directed toward debt payments. As a result, lower ratios are less risky and may receive lower interest rates. This is because it shows the lender that you can repay the loan.
Some lenders may also have additional eligibility requirements, such as;
- Canadian resident or citizen
- Canadian bank account
- Government-issued ID
- Minimum age
Depending on the strength of your application, you may need a co-signer. This additional applicant will take responsibility if you cannot repay the loan. The co-signer must typically have a good credit score and a stable income.
The Finer Details
Before getting a bad credit loan, it's essential to understand the loan characteristics. This section will educate you on the finer details of bad credit loans to empower you to make decisions.
Interest Rate
In general, bad credit loans tend to have higher interest rates than loans for individuals with good credit. This is because lenders view borrowers with bad credit as a higher risk and charge higher interest rates to compensate for this risk.
Interest rates for bad credit loans in Canada can range from around 10% to over 50%, with some lenders charging even higher rates. However, the average rate is around 20%.
Fees
Apart from interest, bad credit loans in Canada generally have additional fees. These may include origination fees, application charges, closing costs, and late penalties. The prices and their amounts change with the lender and type of loan. Below you can find some of the most common fees and their typical costs.
- Origination fee: This is a fee charged by the lender for processing the loan application and is usually a percentage of the loan amount, ranging from 1% to 5%. For example, on a $10,000 loan with a 3% origination fee, the fee would be $300.
- Application fee: This is a fee the lender charges for evaluating the borrower's application and may range from $50 to $100.
- Closing costs: These are the costs associated with finalizing the loan and can include fees for things like credit checks, title searches, and legal documents. Closing costs can vary widely but are typically a few hundred dollars.
- Prepayment penalties: Some lenders may charge fees for repaying your loan early. This fee depends if you have an open or closed loan. Open loans will have no prepayment penalties.
- Late penalties: In addition to the fees and interest associated with bad credit loans, they may also come with penalties and late fees for missed or late payments. Sometimes, lenders may offer a grace period for late payments or allow borrowers to make partial payments on the loan.
Keep in mind that these fees can significantly increase the cost of a loan. Additionally, they won't be included in the interest rate. Many bait-and-switch lenders will advertise low rates to lure in borrowers and include various fees which are difficult to understand.
As such, comparing loans using the annual percentage rate (APR) is essential. This calculates the actual cost of borrowing, including the fees. In many cases, the interest rate alone will not include high-cost fees.
Tip: Increasing your credit score
- Try to keep your credit utilization ratio below 30%.
- Make sure to pay all of your bills on time, every month.
- Check your credit report for errors and dispute them if you find any.
- If possible, try to keep open older lines of credit that are in good standing.
- Set up automatic payments if it helps you remember to pay your bills on time.
- Take advantage of 0% balance transfer cards or personal loans to consolidate existing debt.
Term Length
The term length for bad credit loans in Canada can vary between lenders and loan products but typically range from 6 months to 5 years. The term length will affect your monthly loan payment, and total interest paid.
- Longer term length: Your monthly payment will be reduced, but you'll pay more lifetime interest. Additionally, you may have to collateralize something.
- Shorter term length: Your monthly payment will be higher, but you'll pay less lifetime interest. Additionally, you'll be debt-free sooner. These tend to be unsecured loans.
A longer term length may help you qualify for a loan if you can't meet debt service ratio requirements. However, balancing monthly affordability and overall loan cost is essential when deciding on a term length for your bad credit loan.
Repayment Schedule
Typically, the payments will remain the same throughout the loan duration, and you'll know exactly how much you owe each month. Make sure to make all of your payments on time, as late payments can lead to additional fees and negatively affect your credit score. Increasing your credit score will provide access to more favourable loans.
Some loans have various features, such as skip-a-payment options or grace periods that allow you to pay a bit later without penalty. You'll have to talk with your lender to see if these are available. Additionally, you'll want to understand if your loan is open or closed;
- Open loan: The ability to prepay the loan at any time without penalty.
- Closed loan: There are penalties for prepaying too much.
Processing Speed
Bad credit loans typically provide rapid funding in a few hours. However, there are a few characteristics that can slow down the process. Initially, if the loan is secured, there will be additional steps to appraise the value of the collateral. Additionally, more significant loan amounts, such as $10,000 will have a more rigorous application process. Generally, you should expect funding in a few hours to a few days.
Bad Credit Loan Application Process
The application process for a bad credit loan is similar to that for good credit.
- The borrower will typically complete an online application form.
- The lender will review your credit profile, income, and other financial information to determine if they can offer you a loan.
- The funds may be deposited directly into your bank account in a few hours if approved. Some loans are also provided via cheque or prepaid debit cards.
Alternatives to Bad Credit Loans
Borrowers with bad credit have few lending options. However, as they rebuild their credit score, more opportunities will appear. While borrowers should seek to improve their credit scores, alternative options are available.
RRSP Withdrawal
You can withdraw money while avoiding loans altogether if you have sufficient funds in your RRSP account. However, up to 30% of the withdrawal can be subject to withholding taxes. This will be immediately retained by your financial institution, meaning you'll only receive 70% to 95% of the total withdrawal amount.
Additionally, the portion you receive will be included in your taxable income. This means you'll have to pay income taxes on the withdrawal. Tapping into your RRSP will also neglect the future compounding your investments will receive.
Home Equity Loans
Homeowners can secure their home equity by utilizing many mortgage products. Many private mortgage lenders and B-lenders specialize in loans for bad credit. These loans will have a lower interest rate than other options but typically require a maximum of 80% loan-to-value (LTV). However, they'll take longer to receive funding, and you can risk home foreclosure if you frequently miss payments. Some of the most popular home equity options include:
- HELOC: An account with the flexibility of borrowing and repaying money as needed. Interest is only charged on amounts taken out.
- Second Mortgage: An additional smaller mortgage. Like an instalment loan, you'll receive the loan amount as a lump sum and begin making monthly payments.
- Reverse Mortgage: Homeowners of 55 can receive a lump sum or monthly payments, which they will only need to pay once selling the home.
Friends and Family
Borrowing from friends and family may be the best option if you need better credit. It's a great way to avoid loans with expensive interest rates and fees. Although it can seem awkward, having an honest conversation about your financial needs can go a long way in avoiding any misunderstandings down the line. You should also develop an agreement that outlines the repayment terms and interest rate, if any.