Are there banks that will loan with bad credit?
People need loans for many reasons, such as to make a down payment on a mortgage or vehicle, do home renovations, or relieve credit card debt. Many people often look to major financial institutions as the first place to find a loan, since they are excellent places to start applying with options for multiple types of loans. As long as you have a good income and a solid credit history, you will likely be approved.
For those who have the opposite of a high credit score, their applications are simply at the mercy of the banks. While banks consider having a credit score of over 660 to be good, the chances of getting approved are difficult, and credit scores below 660 have less of a chance. If someone with a credit score between 300 and 575 needs a loan, it may be considered a “bad credit loan.”
In Canada, it is not common to find banks that will loan with bad credit, but everyone is welcome to apply, nonetheless. If the bank turns someone away because of a low credit score, what options are left? Aside from recognizable banks, money can be borrowed from alternative lenders. Usually, they will lend different types of loans even if someone has a poor credit score.
Types of bank loans
The easiest bank to get a loan in Canada may be different for each person, and each type of loan requires different conditions. If you’re deciding between whether to borrow from an alternative lender or from a bank, both options offer different types of loans.
When buying a car in Canada, you’ll automatically be applying for an auto loan through the dealership, and therefore a bank. If you’re interested in paying your loan through a specific bank, you’ll have to confirm that your local dealerships are partnered with that bank. Otherwise, the features offered are similar; all the banks offer flexible payment frequencies and allow terms to be a maximum of eight years long.
A loan for a Registered Retirement Savings Plan (RRSP) is just like any loan, except that instead of you directly receiving the money, it all goes into the savings account. This is also known as On the Spot Borrowing, and you borrow to invest in your retirement. RRSP loans have shorter terms than regular loans, but they have the same expectations in which you’ll have to pay back in that specified timeframe.
Personal unsecured loan
Banks in Canada don’t usually offer secured loans and are more likely to offer unsecured ones. They also offer more options with the loans, such as choosing between variable and fixed rates or even skipping one or two payments. Depending on which bank you approach, you could get a loan of $50,000 to $200,000. If you have a bad credit score, around 500 or less, you will have to discuss with the bank directly about what loan options are available to you.
Unsecured loans are a little more challenging to get but remain available to those who do not have a good credit score. The lack of security may cause the lender to attach high interest rates because of lower credit scores.
Houses are meaningful investments, so banks in Canada provide mortgage loans. They are loans that have much longer terms than the other types of bank loans. To meet the requirements for a mortgage from a bank, your credit score will have to be at least 680, implying that credit scores below this threshold may have more of a challenge qualifying.
Types of bad credit loans
Other than the bank, your option to borrow funds comes from alternative lending companies. Depending on your financial situation, a certain type of loan can be more helpful to you. Alternative lenders have four types of loans for bad credit: personal loans, payday loans, vehicle title loans, and credit builder loans.
Personal secured loans
Personal loans for bad credit fall into two categories, which are secured and unsecured; understanding the difference between them is deeply important. In both cases, the loan is a lump sum coupled with a loan term in which you must make monthly payments. People take out either type of personal loan to consolidate debt or make other significant purchases.
To obtain a secured loan, you will need to supply an asset to serve as collateral. In the event that you can’t repay the loan, the lender simply collects the assets. Because of the security that the lender has from the asset, they will also have lower interest rates than unsecured loans.
Essentially, payday loans are small loans with brief terms. The loans are usually under $500 and have to be paid back by the next payday date. At the surface level, it seems like a seamless way to borrow. However, payday loans can have extremely high fees and interest rates. In fact, their interest rates are calculated to be more than 400% of the loan value. Because of this, payday loans can easily build up more debt than fix it and create a vicious cycle of borrowing that is hard to get out of.
Vehicle title loans
Vehicle title loans are a type of secured loan. Similar to payday loans, vehicle title loans can create more debt than relieve them. They have high interest rates and a compensation period of typically thirty days, making it very demanding to pay back. While extensions are possible with vehicle title loans, they are not the best option as it’s easy to become swept up in a cycle of debt.
Credit builder loan
The most unique of all the loans is the credit builder loan. Once you are approved for it, your lender will allocate the loan amount into a separate savings account. As you pay monthly, the lender will be responsible for reporting to the credit bureau that you’re keeping up with your responsibility to pay. After the prescribed term is over, you can access the loan funds and have the benefit of improving your credit score.
Advantages and disadvantages of loans for poor credit
After covering what types of bad credit score loans that lenders offer, understanding both the pros and cons of them is important. Before deciding, consider the following:
The pros include:
- Simpler approval processes — alternative lenders have comparatively lower requirements than major banks. While they do want to know you have the ability to repay, they don’t make extensive background checks and, in some cases, don’t verify income sources.
- Instantaneous results — most applications can be completed online and are short and uncomplicated, usually allowing you to access funds within days or even hours.
- Building your credit score — some companies report to credit bureaus, which allow you to create a positive record of paying on time and slowly improve your credit score.
On the other hand, the cons include:
- Higher costs — such loans usually have higher interest rates and can have hidden fees attached to them. The penalties are also much riskier.
- Smaller loans — the loans that you can get from lenders will not be as high as the loans that you can get from banks.
- Chances of fraud — using your instincts is crucial when looking into loans for a low credit score. Many scammers are active, committing fraud and offering illegal rates.
Home equity loans for bad credit
Regardless of your employment status or credit score, a home equity loan can be the simple solution to meet all your financial needs. Unlike traditional loans that may set a limit based on your credit score, home equity loans are based on the value of your house and the outstanding mortgage, namely the numerical difference between the two.
Home equity loans are secured loans with potentially high value. As such, you’d be able to borrow significantly more than you would from other kinds of loans while paying less for the interest. Home equity loans are available at alternative lenders like Alpine Credits.
Other options: bad credit line of credit Canada
Another common solution for financial relief is with personal lines of credit, and Canadians may wonder what it is and how to get a line of credit with bad credit. Much like credit cards, a line of credit has a credit limit, interest, and a due date for the payments.
Frequently asked questions
To get a loan from the bank, having a decent credit score is one of the basic requirements. If you happen to have a score that falls just below the minimum, one possibility is finding a co-signer or looking for alternative lenders, like Alpine Credits.
The minimum credit score you need for a loan is 600. However, the loan amount, interest rate, and chance of approval will vary according to what your specific credit score is. Meeting the minimum required credit score does not equal guaranteed approval.
The easiest loan to be approved for are payday loans. As previously mentioned, payday loans should not be the first choice if you’re in need of funds in short notice. With their high interest rates, they can be demanding.
Home equity loans from Alpine Credits
If you need a substantial loan for a significant purchase, such as a second home or a major renovation, but have not been approved for a loan with the bank, contact our team of Financial Solutions Specialists at Alpine Credits. We can discuss what options you have given your specific financial situation, no matter where you are in Canada.
The application process is simpler with Alpine Credits than it is at major financial institutions. There is no credit check, as your credit history or credit score have no effect on your home equity loan with us. As long as you have paid at least 20% of your mortgage, you can easily find approval from us. A home equity loan may be the solution to your financial needs.