How to borrow money with bad credit

Navigating personal loans with bad credit can be a daunting experience. While there's often some confusion about whether having a bad credit score will prevent you from taking out more loans, we're here to let you know that it is possible. You just need to know what you're doing and what to watch out for.

To learn more about how you can take out personal loans with a less-than-ideal credit score, take a glance through our comprehensive bad credit loan guide below for all the details.

What is a credit score?

A credit score is a three-digit number that indicates how good you are at borrowing and managing money. A Credit score can range anywhere from 300 to 900. With this information, lenders are able to determine how risky it will be for them to lend you funds in the future. Higher credit scores suggest lower credit risk, which will make it easier for you to qualify for personal loans with better interest rates.

When you open a credit card and other personal loans, your information and data are sent to credit bureaus, which are responsible for creating comprehensive credit reports and credit scores for individuals. Within a credit report, you'll find details about an individual's credit payments and an overall look at their credit history.

How is a credit score calculated

To be honest, there's really no way of determining what factors a credit bureau will use in their credit report to calculate an individual's credit score or how their ongoing actions influence their overall credit score. That said, here's a general overview of some of the factors that could impact your score:

• How long your credit history is.

• Whether there are balances on your credit cards.

• How often you make payments and whether you miss your payment deadlines.

• The total amount of your outstanding debts.

• The types of credit you have.

• How close you are to reaching your credit limit.

Again, this isn't an exhaustive list. Most credit bureaus like Equifax and TransUnion tend to keep their specific formulas tightly under wrap.

What is considered a poor credit score?

While all personal loan lenders may have different parameters regarding what constitutes a poor credit score, most consider a score under 560. However, some personal loan lenders may choose a different minimum credit score for their cut-off.

Here's a closer look at how credit scores

What is the lowest credit score in Canada?

Speaking of low credit scores, you may be wondering what the lowest credit score in Canada is. Here's a look at what is considered a low credit score and a high credit score:

• Anything below 560: Poor credit score

• 560 - 659: Fair credit scores

• 660 - 724: Good credit scores

• 725 - 759: Very good credit scores

• 760 and above: Great credit scores

Ultimately, if your current credit score is at 560 or near this range, you'll generally be regarded as having poor credit, which could impact your ability to secure loans in the future.

Can I get a personal loan with bad credit?

While having a bad credit score could make finding a personal loan more difficult, it's not impossible. There are, in fact, numerous bad credit loans available for Canadians to apply for if their credit rating is less than ideal. That being said, many lenders have a minimum credit score requirement for those applying for a personal that you'll need to be aware of before sending in your loan application, as you may not be able to get a personal loan with bad credit from certain credit unions and banks.

Can I get home equity loans in Canada with bad credit?

So, what about a HELOC? Can you get a HELOC with bad credit? A HELCO, also known as a home equity loan, is a type of revolving line of credit that will use your current home as collateral. Home equity loans allow you to borrow against the equity you’ve acquired in your home up to date through your mortgage payments.

In Canada, a home equity loan typically requires a minimum credit score between 620 and 650. That said, most traditional lenders prefer customers to have a credit score of around 700 in order for them to approve their request to borrow money. Keep in mind, however, that this is just an approximation, and the actual minimum credit score required by lenders could very much be different. So, if you're in the market for this type of credit line, speaking with different lenders and filling out multiple applications is your best bet in this scenario.

What are the different types of bad credit loans for Canadians?

Whether you need to pay off emergency expenses like medical bills or need some extra cash to pay your monthly bills, when it comes to bad credit loans in Canada, there are a couple of options available to you, depending on your needs. Here's a closer look at some bad credit loans you may want to think about:

Secured loans

Secured loans for bad credit are a type of loan that requires the applicant to have collateral, which is an asset with high value, such as a home or vehicle, before the lender will go through with the loan approval. In the event you are unable to pay back your loan amount, your lender will then seize your assets to recover your loan funds. Ultimately, secured loans offer lenders a lower risk, which in turn can lead to more competitive interest rates and a higher probability that you'll be approved for the loan with bad credit.

Unsecured loans

In contrast, an unsecured loan agreement does not require the applicant to offer a type of collateral in order to be approved. As such, these types of unsecured loans for bad credit are more of a risk for lenders than secured loans. Because of this, there may be a higher minimum credit score needed by the lender, which could make it more difficult for someone with poor credit to be approved. Additionally, the interest rates associated with unsecured loans tend to be higher and less competitive.

Payday loans for bad credit

Payday loans are a type of short-term, unsecured loan that can be a quick fix if you need emergency funds. Payday lenders will give you a cash advance immediately on your next employment cheque. In theory, you’re supposed to pay back the loan amount as soon as you get paid. That said, there are some risks to these short-term loans that you need to be aware of.

Unlike other personal loans, payday loans for bad credit come with incredibly high interest rates. So, by the time your loan payment is due, you'll owe your lender a lot more than what you originally borrowed. And, in a scenario where you are unable to pay back your payday loan in time, your high interest rates will continue to add up quickly, putting you in further financial risk that can be difficult to get out of.

How can I get a bad credit loan?

As we mentioned earlier, very low credit scores and an overall poor credit history can make it difficult for some to find personal loans. However, with a bit of time and effort, it's not impossible. If you're considering bad credit personal loans, here's what you need to do:

Get a credit score check

Before you do anything else, the best thing you can do is check your credit score online to get a better idea of where your score lies. To do so, you can call your credit card company and ask them to run a credit check for you. You can also get a free credit score check with KOHO.

It's important to note that having a low credit score could mean that lenders might not offer as much financial assistance as they would to someone with bad credit who doesn't have as low of a credit score.

Look at your credit card balances and other debts

Another thing bad credit lenders will consider is your debt-to-income ratio. This ratio is determined by dividing the amount you owe each month by your monthly net income. Lenders will analyze this ratio to assess how effectively you pay off your monthly debt repayment terms and whether you're a good candidate to take on more debt. Additionally, because of your already poor credit score, lenders will look at whether you have a steady income before approving your loan application.

Compare different bad credit loans available

Now that you have a better idea about where your low credit score lies, you'll be able to go ahead and compare different bad credit personal loans available. Generally speaking, there are three places you can apply for bad credit personal loans:

Traditional lenders

While going to a bank may seem intimidating when you have a poor credit score, if you already have a bank account with them and have been a customer for years, we suggest starting here when looking for personal loans. Some banks will be willing to negotiate with you if you require financial assistance. However, they may have more rigorous application parameters you'll need to provide before your personal loan is accepted.

Online lenders

Another option you can look at when applying for personal loans with bad credit is online lenders specializing in bad credit loans. When applying for an online loan, you'll typically be met with fewer qualification requirements than you would with traditional personal loans from banks and credit unions. However, you may end up paying an interest rate that is higher than what you are offered for traditional loans.

Credit unions

Your last option is credit union loans. Credit unions offer personal loans to those with bad credit and are overall more understanding when it comes to individuals' financial circumstances. Depending on your credit check, you may be able to secure more favourable interest rates with some lenders than others.

When doing your research, make sure to compare interest rates and repayment terms from a minimum of three different lenders. This will give you a better idea about how much funding you qualify for and what your interest rate will look like. Personal loan amounts can range anywhere from $1000 to $100,000. That said, with bad credit, you may be capped at a maximum loan amount of $50,000, no matter where you choose to apply.

Check your bad credit loan eligibility

Once you've compared lenders, interest rates, and loan amounts, you can now go ahead and check your eligibility. Prequalifying enables you to view whether you'll qualify for the loan and what your estimated rates are without affecting your credit score on the credit report. Most lenders provide prequalifying for free.

In the event you don't qualify for a personal loan with your bad credit, you may be able to ask the lender whether you can get a co-signer. In this scenario, your co-signer will need to be someone you know personally who has a healthy credit score and is willing to take on responsibility for said loan.

Have a hard credit inquiry performed

The next step in your journey is to begin the application process for your bad credit personal loan. During this time, your lender will perform a hard credit check, also known as a hard pull. When doing so, there's a high chance that the credit check will lower your credit score even further. This typically happens when a hard credit check is performed. However, this dip in your credit score is only temporary and is usually balanced out within a couple of months as you begin to make your monthly payments on time.

We should mention that applying to multiple loans and having numerous hard credit checks in a short period of time can severely impact your credit score, which could look like a red flag to lenders. So, be wary when applying to several lenders at once.

Receive your bad credit personal loan

Once everything is said and done and your paperwork has been signed, you'll then have your loan amount transferred from your lender directly into your bank account. However, if you've chosen to get a personal loan for your debt consolidation, your lender may offer you the option of paying off your other loan balances directly.

Pay off your loan balance

Remember, once your loan amounts have been deposited into your bank account, you'll receive a monthly bill you'll need to pay until your balance has reached zero. It's essential that you make your minimum monthly payment, if not more, in order to not worsen your bad credit even further.

What to think about before getting a bad credit loan

Deciding to take out another personal loan is a big decision, especially if you've already got debt and a bad credit score. Therefore, before applying for a loan with bad credit, here are some things you need to keep in mind:

Interest rates

Unfortunately, because you have bad credit, you'll likely pay higher interest rates than someone with a normal to excellent credit score. Again, this is because you'll be seen as more of a risk to lenders. That said, taking out a bad credit loan is an opportunity for you to improve your credit score and lower your credit utilization ratio, should you use the personal loan to pay off some of your credit card debt.

The loan amount may not be substantial

While most lenders will offer personal loans to those with bad credit scores, you won't get as much funding as someone who is in a better financial position than you. Most will have a maximum borrowing limit of $50,000, but it could be significantly lower depending on your actual circumstances.

Your loan repayment terms may be shorter

Finally, when it comes to getting a loan with bad credit, you should also know that there's a high probability that you'll be getting a short-term loan agreement. Generally speaking, short-term loans for bad credit can range anywhere from six months to five years compared to other personal loans that offer more extensive repayment periods.

Loan fees

Furthermore, getting a loan with bad credit may also come with additional fees in Canada that go beyond interest rates. These additional fees tend to include the following:

Late payment fees

Should you be unable to make your monthly payment on time, there is a chance your lender will begin charging you late payment fees on top of your interest rate.

Non-sufficient funds fees

Another fee you may incur is one for having non-sufficient funds in your bank account. Because you're getting a loan with bad credit, lenders are naturally going to be more cautious when allowing you to borrow money. As such, if your account does not have the required funds held in it to pay off your monthly statement, you could be charged an additional fee.

Penalties for paying loans ahead of time

While paying off your loan ahead of time is a great way to get yourself out of debt quicker, in this scenario, it may do more harm than good. Some lenders may actually penalize you for doing so.

In the end, before signing any loan agreements, it's essential that you take a look at the terms and conditions so you fully understand what your obligations are as a borrower. Doing so could help you avoid the fees we just mentioned or others.

Beware of bad credit loan scams

As a word of caution, there are a couple of things you need to be careful of when applying for personal loans with bad credit. Because you're in a vulnerable financial spot, some online lenders and unions will try to take advantage of your situation. Here's what you need to be aware of:

Upfront costs

Not all lenders are as ethical as others. And because you're applying for a bad credit personal loan, you could be taken advantage of when it comes to fees. No reliable lender will ask you to pay upfront fees before depositing your funds into your account. If they try and do so, run the other way.

Loans so good it's too good to be true

Another thing you should be cautious of is personal loan rates and loan amounts that are too good to be true. Again, because you're applying for a loan with bad credit, you need to be realistic when it comes to how much money you'll receive and your interest rates. If you come by an advertisement from online lenders who claim they don't do a credit check or offer ridiculous loan amounts, you may want to consider other options.

The lender can't prove their licensing

And, of course, it goes without saying that you should not get a personal loan from lenders who are not properly licensed in Canada and your province. Make sure to ask for physical proof of their licensing to confirm that they are legitimate lender. If they are, they shouldn't have a problem showing you their credentials.

Offers you didn't ask for

The fact of the matter is that some unethical lenders out there are going to approach you with offers you didn't ask for, even if you've never contacted them before. If you haven't personally reached out to a lender for loans, do not reply to them, as they are likely looking to scam you out of your money.

Alternatives to bad credit loans

If you've gotten this far and aren't sure whether loans for bad credit are the way you want to go to secure money, there are alternatives you can look into that may better suit your needs.

Credit cards

Generally speaking, getting a virtual credit card may be your best bet. Although credit cards tend to have higher interest rates than personal loans for bad credit, they are a good option if you're dedicated to making your monthly payment on time. With a credit card, you'll have access to your money whenever you want, up to your credit limit, of course. Not only does this offer you convenience, but it also gives you the freedom to pay for your expenses on the go. An added bonus to credit cards is that they can also help you improve your overall credit score if you use them responsibly.

Personal loan from friends or family

Depending on your personal circumstances, if a personal loan from an actual financial institution is not something you're looking to do, you could always ask your closest friends and family if you could borrow some money from them instead. While you won't need to go through a formal application process, put your credit history under a microscope, or pay interest (in most cases), failing to pay back someone in your immediate circle could lead to some... awkward conversations in the future. So, again, proceed with caution and only use this method if you're really strapped for cash and open to repaying them on time.

How to improve your bad credit score

Having a bad credit history and score is something no one wants to experience. That said, life happens, and maybe you weren't as responsible with your money as you should have been. That's okay. While it may take some time, there are several ways that you can fix bad credit and put yourself in an overall better financial standing from where you are currently.

So, if you want to improve your credit score, here is what you need to do:

Keep your credit utilization ratio low

As we touched on, your credit utilization score is the amount of debt you have compared to your available funds. In general, this ratio is about 30% of your overall credit score. Ultimately, financial experts say that you need to keep your utilization ratio under 30%. Anything over will indicate to creditors that you're spending beyond your means and are unable to manage your debt responsibility.

So, what exactly can you do to keep your ratio as low as possible? First, you can start by paying off any high-interest debt you may currently have. Doing so will help you save money on your interest payments over time.

Another method that may work for you is contributing more than your monthly minimum payment to reduce your principal balance as quickly as possible. This will also help you save some money on your interest as well.

Make your monthly payments on time

Did you know another 35% of your overall credit score is based on your payment history, aka your ability to make your monthly payment on time? It really goes without saying that making your payments on time is another way to show creditors that you're able to use and pay back your debts responsibly. And, in a lot of ways, it indicates to lenders that you are a trustworthy person with a lower-risk profile. Ultimately, missing your payments will be listed on your credit report and will be a major red flag for lenders if you're trying to get a loan in the future.

To fix this, you may want to set up automatic payments with your financial institution. Doing so will ensure that the minimum payment or another specific amount you set will be transferred from your bank account to your debts by the due date. If this isn't an option with your bank, you can always set up calendar reminders on your phone for the day before your statement is due to keep you accountable.

In the event that you do miss your due date, you should still make an effort to pay off the minimum amount or more as soon as possible. Most lenders don't report a missed payment unless it's been a month or so overdue.

Diversify your credit

Whether it be student loans, auto loans, a mortgage, or another type of personal loan, diversifying the type of credit you have can show lenders that you are dedicated to managing different obligations when it comes to your finances. Over time, and with the right strategy in place, you'll slowly be able to see your credit score increase!

Use your credit wisely

Beyond making on-time payments and keeping your credit utilization ratio low, you also need to make an effort to use your credit as wisely as possible. Ultimately, when you use your credit wisely and pay it off on time, it really is a great way to improve your credit scores.

To prove to creditors that you are able to spend responsibly, consider using your credit card for small, manageable purchases. Whether it be gas, your phone bill, or groceries, try using it for expenses that are recurring, and ones that you would need to pay for anyways.

You should also make an effort to pay your credit card off in full each month if it's possible to avoid paying interest on top of what you owe. Additionally, avoid maxing out your credit at all costs, as it could suggest to lenders that you are in financial trouble.

Lastly, if you feel comfortable doing so and know that you could handle the additional leeway, you may wish to consider a credit increase if you already have a relatively good relationship with your credit union or financial institution. Getting a credit increase will automatically improve your utilization ratio. However, you should only consider this request if you know you'll continue to use your available funds responsibly. Otherwise, you could be digging yourself into more of a financial hole.

Be patient

Always remember to be patient when it comes to your finances and overall financial health. A dramatic change to your credit standing is not going to happen overnight. And if we're being completely honest, it probably won't happen in a couple of months, either.

Think of it as playing the long game. By establishing responsible financial habits now, you can set yourself up for the future. Remember to make your payments on time by checking your bank statements and setting up automatic payments. Only use your credit card when you really need to and for purchases that are a necessity. While it may be difficult to adjust your spending habits in the beginning, budgeting your plans for spending saving ahead of time and living within your means will help you on your journey to getting a healthy credit score in the 700 range or higher, eventually.

Bad credit? Improve your finances with KOHO

Whether you're looking for personal loans or want to build your credit with KOHO, we've got you covered.

From financial resources to customized products like our high-interest savings account with overdraft protection coverage, KOHO helps Canadians just like you, take control of their finances. If you're interested in learning more about the different solutions KOHO offers, give us a shout--we're ready to chat!