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.
above 22% is considered high, exceeding the interest rates of most credit cards. Additionally, an APR above 40% is considered extremely high.
Warning: Be cautious with very high interest loans (e.g. payday loans)
High-interest loans are unsustainable for extended periods and can be expensive for long-term borrowing. If you are currently facing financial challenges, reach out to Credit Counselling Canada for complimentary financial counseling at +1 866-398-5999.
|Number of Employees
|Up to 18 months
|19.90% - 45.90%
|$1,000 - $5,000
|6 - 36 months
|19.99% - 46.80%
|$1,500 - $20,000
|12 - 60 months
|19.99% - 34.99%
|$500 - $12,500
|12 - 60 months
|N/A** (Part of CanCap Group)
|19.99% - 46.93%
|Up to $15,000
|29.99% - 46.96%
|$500 to $15,000
|9 - 60 months
|29.99% - 46.96%
|$500 - $20,000
|9 - 84 months
|$50 - $10,000
|Depends on type of loan months
*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.
|Accessibility with poor credit
|Higher interest rates
|Shorter term length
|Increase credit score
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;
This section will discuss the five main types of bad credit loans and their implications.
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:
Example Personal Lenders for Bad Credit
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
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.
Example Auto Lenders
Example Car Title Lenders
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
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.
Example Private Mortgage Lenders
Example Mortgage B Lenders
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;
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. If you are meeting the income requirements and just need a little boost, you can talk to your immediate family members, such as parents or siblings, to be a guarantor for your mortgage.
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.
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%.
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.
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.
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.
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.
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;
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.
The application process for a bad credit loan is similar to that for good credit.
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.
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.
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:
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.