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Personal Loans and Bad Credit Loans in Canada - What You Need to Know?

6 min read

Can I get a personal loan with bad credit?

Written By

Gaby Pilson
Gaby Pilson

Rounding it up

  • It is sometimes possible to get a personal loan if you have bad credit in Canada.

  • If you don’t have a good credit score, lenders will take into account a wide range of other factors before approving your loan, such as your employment situation and your debt to income (DTI) ratio.

  • Keep in mind that many personal loans for people with bad credit have high interest rates. Some even require that you have a co-signer or that you put up collateral for your loan. This can make them very risky, so proceed with caution.

  • If you can’t get approved for a loan with your current credit score, consider taking a year or two to build up your credit rating so you’re able to get financing from a wider range of lenders in the future.

If you have less than stellar credit, the idea of getting approved for a loan might seem like a far-fetched fairy tale. But while having a low credit score will certainly make it harder for you to get approved for many things like loans and credit cards, it doesn't shut you out of the financial world for good.

We know that applying for personal loans can seem daunting if you don't have a good credit history. In this article, we're going to discuss some of the many things people with low credit scores should know about applying for a bad credit loan to help you decide if a personal loan is the right option for your needs.

What is Considered “Bad Credit” in Canada?

To help guide our discussion of whether or not it's possible to get a personal loan with bad credit in Canada, we first need to define what “bad credit” even means. Everyone has their own ideas of what a poor credit score is, but there are some standard definitions that we can use to clarify what we really mean when we talk about bad credit ratings.

In Canada, credit scores range from 300 to 900. Anything below about 560 would be considered “bad credit” to most major credit bureaus and the majority of financial institutions. Of course, there are some banks and lenders who define “poor credit” differently, but scores below 560 are normally what we're referring to when we talk about having a low credit rating. When applying for an auto loan or other line of credit this score can play a huge role in how your application is viewed.

What is a Bad Credit Loan?

Unlike traditional personal loans which come with stringent credit requirements, bad credit loans in Canada are specifically designed to accommodate people with a less-than-perfect credit history. These loans for bad credit in Canada may carry higher interest rates reflecting the risk associated with lending to someone with a low credit score. However, bad credit loans provide a valuable financial lifeline for those who might otherwise struggle to secure a traditional personal loan.

Steps to Get a Loan with Bad Credit

Assess Your Credit Score and Reports:

To begin, obtain your credit score and reports from the major credit bureaus (Experian, Equifax, and TransUnion). Your credit score reflects your creditworthiness and can range from poor to excellent. Review your credit reports for any errors or discrepancies that may be negatively affecting your score. Address these issues to improve your credit standing.

Budget for Affordable Monthly Payments:

Before applying for a bad credit loan, carefully assess your monthly budget. Calculate your income, expenses, and existing debt obligations. Ensure that the loan payments, including interest and fees, are manageable within your budget to avoid further financial strain.

Compare Different Bad Credit Loan Options:

Bad credit loans come in various forms, such as personal loans, payday loans, and secured loans. Research different lenders, including traditional banks, credit unions, and online lenders. Pay attention to the interest rates, repayment terms, and any hidden fees associated with each loan option. Choosing the right loan can save you money in the long run.

Get Prequalified for Loan Offers:

Many lenders offer prequalification processes that allow you to check your eligibility without impacting your credit score. This can provide you with an estimate of the loan terms you might qualify for, helping you narrow down your options before submitting a formal application.

Exploring Secured Loan Alternatives:

If your credit is extremely poor, consider secured loan options. Secured loans require collateral, such as a car, home, or savings account. Offering collateral reduces the lender's risk and may result in more favorable terms, such as lower interest rates and higher loan amounts.

Adding a Co-Signer for Approval:

If you have a trusted friend or family member with good credit, they can act as a co-signer on your loan. Their good credit history can boost your chances of loan approval, as the lender considers their ability to repay the loan if you default. However, remember that the co-signer is equally responsible for the loan and any missed payments can affect their credit.

Gathering Required Financial Documentation:

Different lenders may have specific documentation requirements. Prepare documents such as pay stubs, bank statements, proof of employment or income, and valid identification. Having these ready in advance will expedite the application process and demonstrate your financial stability.

Preparing for Hard Credit Checks:

Keep in mind that a full loan application typically involves a hard credit check, which can temporarily lower your credit score. Be strategic about applying for loans to minimize the impact on your credit. Submitting multiple loan applications in a short period can signal financial instability to lenders.

Finding Lenders without Strict Credit Requirements:

Seek out lenders that specialize in bad credit loans, as they are more likely to have lenient eligibility criteria. In Canada, for instance, you can find lenders who focus on helping individuals with poor credit scores. These lenders may consider factors beyond your credit score, such as your employment history and income stability, when evaluating your application.

By following these steps and being well-prepared, you can navigate the process of obtaining a pesonal loan more effectively and increase your chances of approval while managing your financial responsibilities responsibly. While bad credit loans provide an opportunity for financial empowerment, it’s vital to understand the fine print and additional costs that may come with them. Also, beware of predatory lenders who prey on desperate borrowers by offering bad credit loans in Canada at exorbitant rates and on unreasonable terms.

Benefits of a Higher Credit Score When Looking for a Personal Loan in Canada.

In today's fast-paced world, the ability to get behind the wheel of a new or used car, purchase a new home, or make other large purchases with a loan or line of credit is often essential for both personal and professional needs. However, when it comes to securing a personal loan in Canada, a healthy credit score can be your golden ticket to more affordable car financing. In this blog post, we will explore the benefits of maintaining a high credit score and how it can significantly ease the process of getting approved for a loan and other lines of credit, even if you're considering bad credit loans.

The Foundation of Financial Freedom: A Good Credit Score

Your credit score is not just a number; it's a reflection of your financial history and responsibility. Maintaining a high credit score comes with several benefits, and one of the most crucial advantages is the ease of obtaining a personal loan in Canada. Let's delve into the significant benefits a higher credit score can offer for car financing:

1. Lower Interest Rates:

A good credit score can be your ticket to lower interest rate expenses when applying for a personal loan. Lenders use your credit score as a gauge of your creditworthiness and risk level. With a high credit score, you're viewed as a responsible borrower who is more likely to make on-time payments. As a result, lenders are willing to offer you more competitive interest rates. This lower interest rate may seem like a small detail, but it can have a substantial impact on your financial well-being.

For instance, let's consider two individuals applying for a loan: one with an excellent credit score and another with a lower score. The individual with the excellent credit score could potentially secure a personal loan with an interest rate of 3%, while the one with a lower score might have to accept a loan with an interest rate of 7%. Over the life of a loan, the savings from that lower interest rate can amount to thousands of dollars and make your payments lower.

2. Greater Loan Options:

A robust credit history opens the doors to a wider range of loan options for both new and used cars. Lenders have different criteria for borrowers, and having a high credit score puts you in the driver's seat when it comes to choosing the car you desire. You're not limited to certain makes or models; you have the freedom to explore a broader selection of vehicles that fit your needs and preferences.

You will also have more freedom when it comes to making other purchases such as a new home, funding home renovation, or paying for other large expenses. Better credit scores allow you to negotiate more effectively to get the highest loan amount, at the best possible rate. You can afford to be choosy with your personal loans when you have the credit score to back you up.

3. Reduced Down Payments:

The down payment is often one of the initial financial hurdles when making a purchase that requires a loan and getting a personal loan approved. Lenders are more inclined to offer favorable terms on down payments for individuals with excellent credit scores. Typically, a smaller down payment is required from borrowers with strong credit. This means you won't have to part with a significant sum of money upfront, making it more manageable for your budget.

A reduced down payment not only eases the financial burden of large purchases but also allows you to consider higher-quality vehicles. With a smaller down payment, you can potentially afford a car with more advanced features, better safety ratings, or improved fuel efficiency, depending on your preferences and priorities. You will also have more money to work with for those home improvement projects, family investments, or other expenses you need a loan to accomodate.

The Challenge of Bad Credit Loans Canada

Securing a loan with less-than-perfect credit can indeed present challenges, but there are several strategies to make the process smoother and increase your chances of approval. Here's a detailed look at these strategies for individuals considering bad credit personal loans in Canada:

1. Work on Your Credit

Obtaining Your Credit Report: Start by obtaining a copy of your credit scores and report from major credit bureaus, such as Equifax and TransUnion. It's essential to review your report thoroughly to identify any errors or discrepancies that may be negatively impacting your credit score. Ensure that all the information is accurate before you apply for any loans.

Correcting Inaccuracies: If you discover any inaccuracies on your credit report, promptly dispute and rectify them. Common errors may include incorrect account information, unauthorized accounts, or outdated information. Addressing these inaccuracies can lead to a boost in your credit score, making you a more attractive candidate for a loan.

2. Build a Positive Payment History

Consistent On-Time Payments: One of the most effective ways to improve your credit history is by making consistent, on-time payments on existing loans, credit cards, and other financial obligations. This demonstrates your financial responsibility and gradually rebuilds your creditworthiness.

Setting Up Auto-Payments: Consider setting up automatic payments for your bills and loans to ensure that you never miss a due date. This not only helps improve your payment history but also simplifies your financial management.

3. Consider a Larger Down Payment

Offsetting Credit Score Impact: To mitigate the impact of a lower credit score when applying for a personal loan, you can consider making a larger down payment. A substantial down payment not only reduces the amount you need to borrow but also demonstrates your commitment and financial stability to the lender.

Potential for Lower Interest Rates: A larger down payment may also increase your chances of securing more favorable loan terms, including a lower interest rate. Lenders may view your investment as a lower risk, making them more willing to offer competitive rates.

4. Explore Specialized Lenders

Bad Credit Loan Specialists: In Canada, numerous lenders specialize in perosnal loans. These lenders have a deep understanding of the challenges faced by borrowers with less-than-perfect credit and are often more willing to work with individuals in such situations.

Flexible Terms: Specialized lenders may offer more flexible loan terms and eligibility criteria, making it easier for you to get approved. While interest rates may be higher than those for borrowers with excellent credit, these lenders focus on your ability to repay the loan and your current financial situation.

5. Utilize a Co-Signer:

Credit and Loan Benefits: If you have a trusted friend or family member with a strong credit history, you can enlist their help as a co-signer for a traditional loan. Having a co-signer can significantly boost your chances of approval because the lender considers both your credit and the co-signer's credit.

Shared Responsibility: It's important to note that a co-signer is equally responsible for the loan and its payments. Any missed payments can impact both your credit and the co-signer's credit. Therefore, this should be a well-considered decision, and both parties should fully understand the financial commitment involved.

Is It Possible to Get a Personal Loan With a Low Credit Score?

If you need help with loans and approvals then you may want to consider a personal loan for your auto loan needs. If you happen to have a credit score below 560, you might be wondering if it's possible for you to get a personal loan. As is the case with most things finance-related, the answer to this question is, well, it depends. There are many things to consider when looking for a personal loan.

There are a number of reasons why someone might have a poor credit score. This could simply include a lack of previous credit history, which is common among young people and recent immigrants, or it could be because someone routinely missed their debt payments in the past. Filing for bankruptcy or a history of defaulting on loans could also cause your credit score to drop significantly.

Whether or not you'll be able to qualify for a personal loan with bad credit will depend on a lot of factors, one of which is certainly why you have a low credit rating in the first place.

Many lenders don't want to extend lines of credit to people who have struggled to pay their debts off in the past. They also may not want to trust people with limited credit histories as these borrowers haven't yet proved their ability to repay their loans. There are some lenders who are willing to work with people that have defaulted on debt in the past or who have limited credit histories, but they can be difficult to come by.

Lenders who are willing to work with people who have poor credit typically charge higher interest rates and offer less money than lenders who work with borrowers who have excellent credit. In some cases, lenders may even require that you have a co-signer on your loan or that you put up collateral in case you default. All of this means that, while getting a personal loan with bad credit might be possible, it may not always be a good idea.

It's ultimately up to you to decide whether you're willing to take on the extra costs and risks that come with personal loans that are designed for people with bad credit. In some instances, it may actually be better to work on building up your credit score first through something like KOHO's Credit Building tool, so that you can apply for a loan with more favourable terms at a later date.

What Disqualifies You From Getting a Personal Loan?

To understand why it's so difficult for people with bad credit scores to get a personal loan in the first place, we need to consider all of the various eligibility requirements that lenders take into account when deciding whether or not to approve your application.

Here's a quick look at some of the many factors that lenders consider when approving or denying personal loan applications. Understanding how the personal loan process works can help you secure the auto loan that makes it easier for you to purchase your dream vehicle. Consider the following when comparing a personal loan to a personal loan option.

Low Credit Score

As this is an article about how having bad credit can make it difficult for you to get a personal loan, it should come as no surprise that having a low credit rating can disqualify you from a loan. Every lender has their own credit rating criteria that they use to decide whether or not they're going to approve your personal loan request, and if your score is below that threshold, your application might get rejected without much other consideration.

In some cases, a lender might be willing to give loans to people with credit scores in a certain range if they can get a co-signer or provide collateral (this would be called a secured loan). However, many lenders will simply reject you outright if your score doesn't meet their minimum requirements.

Unrealistic Loan Requests

Banks and other financial institutions that offer loans only want to do so if they can reasonably expect to recoup most or all of their funds. As a result, most lenders won't approve your loan if you ask for an unreasonably large amount of money given your current income levels.

For example, if you ask for a $200,000 personal loan with a 5-year term but you make $30,000 a year, you'll be hard-pressed to find a lender that will agree to those terms. That's because it would be impossible for you to pay back your principal balance and all of the interest you'll be charged based on your current income level.

High Debt-to-Income (DTI) Ratio

When considering whether or not to approve your personal loan application, lenders will also take your debt to income (DTI) level ratio into consideration. A debt to income ratio is a way to show how much of your monthly income goes toward your debt monthly payment.

DTI ratios are important for lenders to consider because banks don't want to give loans to people who will ultimately struggle to pay back the money. Someone who requests a loan that would bring their DTI to 75% each month could potentially afford those monthly payments if they had otherwise very low costs of living.

Unstable Employment Situations

When people borrow money through a loan, they typically do so because, while they don't have the cash on hand now, they will eventually earn enough money to cover the cost of the loan amount, plus any interest.

Personal loans are a high risk for lenders. As a result, your employment status is an integral part of your personal loan application, and it can have just as much of an impact on your ability to get approved as your credit score.

Intended Use Inconsistent with Lender Criteria

Last but not least, your personal loan application can be quickly rejected if what you intend to use the money for doesn't line up with the lender's criteria for that type of loan. Letting them know you are looking for an auto loan to help with payments and purchases can help.

For example, personal loans generally shouldn't be used for things like education or buying a home as there are other loan types that are better suited for those purposes (and can often get you better interest rates). Many lenders also won't give you a loan if you're going to use the funds for gambling or investing.

That being said, most personal loans are very flexible and lenders will often let you use them for nearly anything. If you're concerned about whether what you intend to use the money for is appropriate for a personal loan, contact a loan servicer directly to chat through their eligibility requirements.

Making the Process Easier With Personal Loans

In summary, maintaining a high credit score offers a multitude of advantages when seeking a personal loan in Canada. These advantages encompass lower interest rates, a wider array of loan options, reduced down payments, and flexible payment terms. Ultimately, a good credit score not only makes the process of acquiring a loan more accessible but also empowers you to make more informed choices about your vehicle and financial future. So, be mindful of your credit and strive to keep it in good health to make getting an auto loan in Canada easier and less stressful. You can get a bad credit auto loan and personal loan options, and KOHO is here to show you how to get started!

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!

Gaby Pilson

Gaby Pilson is a writer, educator, travel guide, and lover of all things personal finance. She’s passionate about helping people feel empowered to take control of their financial lives by making investing, budgeting, and money-saving resources accessible to everyone.



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