Bad credit loans are offered to customers with different credit profiles, from average and fair to poor. Such clients are considered high risk and fail to meet the standard lending criteria and guidance. It is more difficult to find a bad credit loan because banks run a credit check to assess risk. Some finance companies offer quick loans but the interest rates are high. Such loans are offered by online businesses and range from $250 to $1,000. They go with a high interest rate, but the rate is usually lower compared to high-interest credit cards. The easiest way to get a loan is to offer collateral.
Reasons Why People Need a Loan
There are many reasons why people with bad credit need a loan, including loss of employment and income, family emergencies, emergency home and vehicle repairs, and emergency dental work. Customers often apply for a loan to pay emergency expenses such as electrical and plumbing problems, cell phone repairs, emergency pet care, insurance premiums, taxes, and water, gas, oil, electricity, and other utility bills.
Need to Pay for Emergency Home Repairs
Customers use short-term loans for emergency home repairs such as roof and masonry repair, gutter repair and cleaning, fence repairs, driveway and foundation repairs, and ductwork cleaning. They also use bad credit loans for plaster repairs, leak fixes, and water heater replacements and furnace repairs.
Need to Pay for Emergency Dental Work
Dental services are not covered in Canada, and customers often pay for emergency dental work and regular dental services. In some provinces, dental care is free for children under 10. Dental care is not included in the universal health insurance system.
Lost Your Job
Loss of employment is one of the main reasons why people apply for a short-term loan. People who are long-term unemployed need money for groceries, utility bills, and other necessities. Those who have children also pay for daycare, education, equipment, uniforms, registration, and fees.
Can't Get a Secured Loan
Some people cannot get a secured loan because collateral is required. Collateral is a guarantee such as vehicle, home, jewelry, or other items of value. The only option left is to apply for a short-term loan or secured credit card to meet urgent expenses.
Best Options for Borrowers with Poor Credit
Ask Family or Friends for Help
One idea is to ask a family member, relative, or friend for a small loan. This is one option to get a no or low interest loan to meet urgent expenses, pay school-related costs, car down payment, or other expenses.
Find a Co-signer
Another option is to find a cosigner with a good credit profile. In this case, the cosigner is also responsible for repayment in case the borrower defaults and is unable to make payments. Financial institutions sue the cosigner first if the borrower stops making payments.
Try Credit Unions
If you are a union member, your credit union is a good choice to apply for bad credit loan. Unions often offer better rates than other financial establishments. They offer affordable financial products and lower fees compared to brick-and-mortar banks.
Peer to Peer Loan
Peer to peer lenders also offer short term loans. This is a practice whereby lenders offer unsecured loans to borrowers without the need for financial intermediaries. Peer to peer networks advertize a simple application process and lower rates than banks.
Get a Home Equity Line of Credit
Home equity lines of credit is offered to customers who agree to use their home as a loan guarantee or collateral. HELOCs go with a variable rate, and payments are made on a monthly basis.
Get a Loan Secured by a Pay Cheque
A final option is to secure the loan by a paycheck. A payday loan is one example of short-term financing whereby financial establishments require verification of employment and income. The payment is withdrawn by the lender on the customer's next payday.
Small Business Loans
Businesses with average or poor credit also apply for financing. Customers who need financing of up to $35,000 are often approved for a small business loan. This type of financing is available to customers with less-than-perfect credit and is government-guaranteed. Another option is to get a business cash advance to solve your cash flow problems.
Some lenders provide auto loans to customers with poor credit but offer higher interest rates. There are providers that offer financing for the purchase of used and new vehicles. They offer different refinancing options to reduce the interest rate. It is a good idea to shop around as some issuers charge between 18 and 20 percent.
Personal Loans and Cash Advance Lenders
Individual customers are also offered personal cash advances but proof of income is usually required. This is a good option for clients who need cash for short-term expenses. Finance companies typically require documents such as statement of benefits or recent paychecks, bank account and account statements, recent utility bills, and ID or driver's licence. There are two options for customers with fair credit, payday and short-term personal loans.
Payday lenders provide small short-term loans with a very high interest rate. The repayment term varies from 14 days to 3 or more months. Amounts also vary from $100 to $2,000. Regular clients are offered larger loans than new customers. However, some issuers offer interest rates of 200 - 300 percent.
Short-Term Personal Loans
Short-term personal loans are also offered by financial companies that advertize faxless application process and fast approval. Banks also offer unsecured loans but it takes weeks to get approved and they have stringent criteria to meet.
Beware of Loan Sharks and Predatory Lending Practices
While there are many reputable providers, watch out for predatory lending practices and loan sharks that charge outrageous rates and fees. Some companies use illegal practices, blackmail, and threats of property damage and violence.
Ways to Fix Your Bad Credit History
There are many ways to reestablish credit and one is to apply for a secured credit card and make timely payments. Secured credit cards work like standard cards, and payments are reported to TransUnion, Equifax, and other bureaus. Another way to repair your credit is to apply for a small secured loan with an affordable rate and make regular payments. Obviously, it is important to develop healthy financial and borrowing habits and avoid missed and late payments.
Bad Credit Personal Loans in Canada
There are finance companies that offer bad credit loans to Canadian borrowers with fair or poor credit. Many of them are members of the Canadian Payday Loan Association which unites lenders of short-term payday advances. Bad credit personal loans are legal in Canada and are subject to provincial regulations and specific regulations, for example, rate caps.
Legislation in Different Provinces
In Ontario, payday loans are offered by online companies, retail stores, and other providers. The Payday Loans Act sets caps to limit interest rates and charges to 21 percent of the original amount. Only licensed brokers are allowed to provide loans.
Newfoundland and Quebec
Bad credit personal loans are prohibited Newfoundland and Quebec, and there are caps on interest rates which makes payday lending illegal in Newfoundland.
Prince Edward Island
These loans are regulated under the Payday Loans Act of Prince Edward Island. Associations, partnerships, corporations, and other entities are permitted to offer cash advance loans. The interest rate cap is set at 25 percent.
Nova Scotia also set the rate cap at 25 percent, and providers are regulated by the provincial government. Customers pay $25 for every $100 borrowed, and this is the maximum allowable charge. Loans are made either over the internet or in cash. Providers that offer online loans are required to specify their permit expiry date, permit number, and business name on the front page.
Loans for people with bad credit are legal in Manitoba but the cap is set at 17 percent. Applicable legislation includes The Business Practices Act, The Payday Loans Regulation and following amendments, the Consumer Protection Act, and others. Cash advance loans are offered in exchange for pre-authorized debit, post-dated check, or similar means of repayment.
Loans for people with less than perfect credit are legal in Alberta but the government set rate caps at 23 percent. The Payday Loans Regulation of 2009 applies to providers operating from local branches and business premises and online lenders. Prohibited practices include offering rollover loans and requesting and requiring financial information that gives providers access to the applicant's account.
British Columbia also set interest caps at 23 percent, and finance companies are prohibited from offering loans of more than 50 percent of the applicant's monthly pay. There are prohibited practices such as collection from employers, tied selling, and others.
The government imposed caps of 30 percent and 23 percent on defaulted loans and principal payments, respectively. Lenders are required to display disclosure requirements to help customers to make an informed decision. They are prohibited from offering rollover loans, discounting of loans, and accepting a guarantee or collateral. Finance companies are also prohibited from offering two or more loans at a time to the same applicant.