Can I get a personal loan with bad credit?

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.

So if you’re wondering whether you can get a personal loan with bad credit, we have some news for you: It is possible to get approved for a loan, even if your credit score isn’t as high as you’d like.

Keep in mind, however, that not all loan providers will be willing to work with people who have poor credit. You may also have to pay higher interest rates or deal with other less-favourable terms because your credit score isn’t great.

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 personal loans to help you decide if doing so 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.

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

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 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.

The other thing to consider when applying for personal loans with a low credit score is that most of the loans you’ll be able to qualify for won’t have very good repayment terms.

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 that 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.

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.

In other words, the bank in this situation would have little reason to suspect that you’d actually be able to afford your monthly payments. Most lenders will compare your monthly income to your hypothetical monthly payment when you apply for a loan. If your loan will take up too much of your monthly income, most lenders will reject your application.

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 payments.

For example, consider a situation where you had a monthly income of $5,000. If you had $2,500 worth of debt payments each month, your DTI would be 50%. Alternatively, if someone with $5,000 in income had $1,000 worth of debt payments each month, their DTI would be 20%.

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, but most lenders would avoid offering financing to that person because doing so would leave the individual with a very tight budget.

There’s no hard-and-fast rule as to how much DTI lenders are willing to accept when approving or rejecting loans. Most lenders look for DTIs of less than 40%. But some banks might have lower DTI thresholds and will automatically reject anyone who can’t meet that criteria.

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.

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.

Banks and other loan providers generally prefer to work with people who have secure employment situations that provide them with a steady paycheque each month. That’s because these people are better able to project how much money they’ll have available for debt repayment once they account for all their other living expenses.

This isn’t to say, of course, that people with inconsistent paycheques (such as people who are self-employed) can’t get personal loans. Rather, it’s simply that people who are self-employed or who don’t have a steady income will need to exceed a much higher standard in other aspects of their application in order to qualify for a loan at the same terms as someone who gets a steady paycheque from a company.

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.

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.

How to Get a Personal Loan if You Have Bad Credit

Getting a personal loan if you have bad credit can feel like a daunting task, but it is possible so long as you find the right lender and loan agreement to meet your needs.

Keep in mind that many personal loans for people who don’t have great credit come with high interest rates, unfavourable terms and conditions, and a lot of financial risk, so they may not be appropriate for everyone. If you’re not sure whether you’re getting a good deal on a loan, consult with a financial advisor to discuss your unique situation.

That being said, if the reason for applying for a loan isn’t particularly urgent, you can also consider taking a year or two to improve your credit score so you can access better loans. There are a number of ways to go about improving your credit, including KOHO’s Credit Building tool, but doing so will always require dedication and a whole lot of patience.