How to secure a loan if you have bad credit

What is bad credit?

Before we explore whether it’s possible to secure a loan if you have bad credit, let’s talk about the concept of bad credit. Your credit rating reflects how likely you are to repay a loan. In Quebec, if your credit rating is below 600, it’s generally considered as having bad credit.

What are the reasons behind bad credit?

If your credit report shows a poor score, it means that your payment history is not great.

For example:

• You were often late in paying bills and the monthly instalments on your loans or line of credit.
• You also most likely used your credit cards without paying the full balance.
• You submitted too many credit applications over a short period of time.
• You recently filed for bankruptcy or submitted a consumer proposal.

If your credit score is low, traditional financial institutions could refuse your loan application or offer you higher interest rates. But don’t lose heart: there are other options available to help you get a loan.

Reach out to specialized lenders

If banks turned you down, consider specialized lenders. Some will agree to lend you money based on certain factors. For example, they will determine your minimum monthly revenue, ask for proof of employment and check your financial history.

Naturally, given your situation, they’ll offer higher interest rates than average.

Our advice: You should exercise caution. Compare several offers and carefully read terms and conditions. If the interest rate offered is too high, you should go elsewhere.

The types of loans you can secure if you have bad credit

There are four different types of loans:

• Secured loans: these loans are secured against one or more of your assets (your home or car, for example). Therefore, if you don’t repay the loan, the lender will seize your asset.
• Short-term loans: these loans must be repaid within a very short timeline, but they carry high interest rates.
• Guarantor loans: you’re granted a loan on the condition that another person (a friend or loved one) agrees to act as a guarantor. In other words, if you don’t repay the loan, they’ll have to repay it.
• Pledge loans: you’re granted a personal loan and one of your assets, such as jewelry or a watch, is required to secure the loan. Based on the type of agreement, the pledge loan lender may either sell the asset or hold it until you’ve repaid the loan or until the repayment deadline has passed.

Beware of quick loans!

An increasing number of companies in Quebec specialize in quick loans. They agree to lend you small amounts and don’t ask many questions. However, you should be careful! The interest rates associated with these loans are often astronomically high (up to 29%)! Furthermore, you have a short timeline to repay the loan (often less than a year). Needless to say, if you take out this type of loan, you could end up in a very difficult situation.

Our advice: Consider this type of loan only as a last resort for emergencies, not for everyday expenses.

High-risk mortgages

If you have bad credit but still want to purchase a home, small banks, credit unions or private lenders do offer high-risk mortgages.

• Their term is shorter, usually less than two years.
• Their interest rates are higher than standard mortgage rates.
• They can offer a temporary solution while you rebuild your credit before refinancing at a better rate.

These types of loans are not suitable for the long term, but they can be an interim solution so you can become a homeowner while you try to improve your credit score.

How can you increase your chances of obtaining a loan?

Here are a few tips that could make it easier for you to secure a loan:

1. Make a larger downpayment

   By setting aside a larger downpayment, you will increase your chances of obtaining a car loan or mortgage. For example, if you want to purchase a car, that initial amount will be deducted from the loan and your monthly payments will be lower. When purchasing a home, if you’ve saved 20% of the total purchase price you’ll instill confidence in your lender, despite your poor credit.

2. Find a reliable co-borrower

   Consider getting a co-signer. You will secure a better loan. A co-signer is a person with good credit who agrees to sign your mortgage loan. Co-signers are often a parent or loved one. However, remember that the co-signer will have to repay your loan if you do not.

3. Understand your financial situation

   In any event, it is important that you understand your financial situation. What is causing your poor credit score? Do you have any debts? Do you have sufficient income? These are all questions you need to ask yourself so that you can then take steps to improve your financial situation.

4. Improve your credit rating

   Once you have reviewed your credit report and understand why banks are turning you down, the best thing you can do is rebuilding your credit. If you’re in no rush, you should actually take the time to improve your score before applying for a loan. As a result, you will be offered better rates. Start by adopting good financial habits as soon as possible. This will directly impact your credit rating.

   • Pay your bills on time.
   • Keep your credit card charges under 30% of your limit.
   • Avoid submitting too many credit applications at the same time.

   Naturally, improving your credit score can take several months. However, it may really pay off. Sometimes, just a few months of extra effort can get you a better loan rate. And that can mean thousands of dollars in savings over the long term.

In short, if you have a bad credit rating, securing a car loan or mortgage is still possible. However, since interest rates will be higher than average and loan conditions may vary from one lender to another, you must tread carefully. If you have time on your side, your best approach is to improve your credit rating. Then you’ll have access to traditional loans from financial institutions.

However, if you’ve accumulated debt and see no way out, don’t hesitate to reach out to a Licensed Insolvency Trustee.