A bad credit loan is a loan available to persons with defaults, arrears, poor credit, those in bankruptcy, the self-employed, and persons with no credit history. These people either are unable to maintain the repayment schedule or have little exposure to credit. They may have excessive debt, a history of missed payments, or they have failed to repay debt completely. In addition, recipients of bad credit loans usually do not own assets or real estate to be used as collateral.
High risk borrowers are those with credit card write offs (written off credit), consumer proposals, and personal bankruptcies. Other factors that affect one’s credit standing include car loan repossession whereby an automobile is seized by the lender, mortgage foreclosure, payday loans and collections, and collections, including cable, cell phone, and utility bill collections reported on the borrower’s credit file.
Borrowers with poor credit are classified as carrying a higher credit risk. A high credit score indicates excellent or very good credit while a low score is an indicator of poor credit. Lenders that provide loans to persons with poor credit take a higher risk of those borrowers defaulting or missing payments. Because of the high credit risk, it is more expensive and more difficult to obtain loans from Canadian mainstream loan providers. Such borrowers are either offered very high interest rates or their loan applications are rejected.
Canadian borrowers who are considered high risk are those overburdened with debt. Indebtedness and over-indebtedness are measured by consumer credit vs. durables, debt-to-income ratio, debt as a percentage of the borrower’s assets, etc. Borrowers who find it difficult to repay debt are those with 4 or more credit commitments. Such borrowers are persons who spend over a quarter of their gross income to pay off debt and those who spend over 50 percent of their gross income to make payments on mortgages and consumer credit.
Poor credit has no favorites, however. It may affect those with six digit incomes and persons on a minimum wage. A period of unemployment, prolonged illness, divorce, or a missed bill can result in poor credit. Bad credit is also a sign of financial mismanagement.
There are two general categories of bad credit loans, bad credit business loans and bad credit personal loans. In addition, there are bad credit auto loans, bad credit mortgages, and other types. Borrowers who apply for unsecured bad credit loans have to meet certain requirements, and one is to be employed. The length of employment required varies from lender to lender, but it is usually between 30 and 90 days. Borrowers who receive additional income may want to include it in the application. Types of income to include are rental income, dividends, investment income, etc. Loan providers also require that borrowers present their routing number and banking information.
Persons who apply for unsecured bad credit loans are asked to complete an online form and send it along with a copy of recent pay stubs, stamped by the borrower’s employer, and a certified copy of ID.
Bad credit personal loans are loans intended for persons with credit problems, including repossession, bankruptcy, collections, foreclosure, and judgments. Loans for people with bad credit are offered with relatively short repayment terms and hefty interest rates. Canadian borrowers who are looking for bad credit loans usually apply with financial companies and not the mainstream financial institutions. It is unlikely to find RBC bad credit loans, CIBC unsecured bad credit loans, or Scotiabank bad credit loans.
Before applying for a bad credit personal loan from a financial company, however, it is good to consider the chances of qualifying for loans from standard loan providers. Credit rating is only one factor determining whether a borrower is a likely candidate for a personal loan. Other factors include income level, debt-to-income ratio, availability of liquid assets, and appraisal. Financial institutions pay attention to the borrower’s debt-to-income ratio, which is based on the money made and owed. This serves to calculate the costs a borrower will incur because of the new loan. This amount is added to previous loans, including car loans, student loans, credit cards, etc. This is how lenders establish one’s debt-to-income ratio, and the lower it is, the better. Income is another factor, and it is factored into the debt-to-income ratio. Lenders usually require that borrowers provide income tax forms and recent pay stubs to check whether the borrower has steady income and a stable job. The loan-to-value ratio is yet another factor, and it is calculated by dividing the borrower’s home appraisal value by the loan amount. The larger the amount of the down payment, the better off the borrower is because it lowers the loan-to-value ratio. Lenders pay attention to this factor because the more money borrowers invest in a property, the less likely it is they will default on the loan. With secured personal loans, financial institutions also require that the applicant’s home is appraised before signing the loan. This is important to ensure that the home offered as collateral is worth what the financial institution is going to lend. All this implies that the borrower’s credit score is only one factor (albeit an important one) that lenders take into account.
For some Canadian borrowers, however, obtaining a bad credit personal loan is the only alternative. They either can’t obtain a standard loan or need immediate cash. It may take a couple of weeks to get approved by a mainstream lender, and this is too long in emergency situations. Loan providers that offer loans for bad credit advertise quick application process and approval, with funds to be received in just 24 hours. Such financial companies commonly offer loans with no credit, bad credit loans, unsecured personal loans, and debt consolidation loans. The loan amount can be used to buy a car, make home improvements, for college tuition, medical issues, debt consolidation, and anything else.
Bad credit auto loans are designed for persons with poor credit who want to finance the purchase of a new or used vehicle. One type of bad credit auto loans to look into is the second chance car loan or bad credit auto loan, available from new car dealers. Such loans are offered to persons who seek to finance a newer used car or a new car. It is the car dealership that sells the vehicle, but the contract is sold to a loan provider. Bad credit auto loans like this require a down payment and are paid off through a fixed number of payments. Borrowers make monthly payments by electronic debit from their bank accounts or by mail. The main advantage of second chance car loans is that payments are reported to the credit bureaus. This gives borrowers a chance to establish or reestablish credit, thus re-entering the prime loan market. Second, borrowers who take a bad credit auto loan like this enjoy a larger selection of vehicles. The automobiles are either newer used cars with low mileage or new automobiles with no miles. Car loans are offered with terms between two years and five years. The downside is that the selling price of such vehicles is higher, and the interest rate is relatively high. Repayment problems are reflected on the borrower’s credit report.
Another type of car financing is guaranteed auto financing whereby car buyers finance a vehicle from a company that owns it. The loan is paid through a fixed number of payments, which are due on a weekly basis. Down payment is also required. Borrowers who fall behind on their payments have to discuss the payment arrangement with the car dealership. Persons who find it impossible to keep up with repayments risk losing the vehicle to the dealer. Auto financing companies are not required to report the buyer’s repayment history to the credit reporting agencies. In addition, dealers that offer such services usually finance used vehicles. An obvious advantage is that the automobiles on offer are less expensive. Borrowers make car payments on a weekly basis and face to face, which is a preferred choice for borrowers who value personal interaction. Finally, many dealers do not require a credit check, which makes these loans a good choice for borrowers with bad credit. An obvious disadvantage is that borrowers who seek to establish credit cannot achieve this by making regular monthly payments. Moreover, the vehicles sold have high mileage and are usually old, making some of them not that reliable.
What are the qualifications for obtaining a bad credit car loan in Canada? Applicants should be Canadian residents who are employed full-time. Many lenders have minimum income requirements, and borrowers should have a guaranteed fixed income over the term of the loan. Many loan providers require proof of residence (credit card statement or utility statement) and a phone number. Borrowers in Manitoba, customers in Quebec, car buyers in Nova Scotia, and elsewhere can apply for a bad credit loan.
Unsecured loans are different from bad credit loans in that they are not specifically designed for persons with poor credit. While some bad credit loans are unsecured, persons with excellent and very good credit scores have a higher chance of qualifying for a standard unsecured loan. Canadian financial institutions that advance unsecured loans rely on the promise of applicants to pay the loan back. Unsecured loans go with higher interest rates because of the higher risk involved, and the loan’s balance is distributed across a set number of payments. Some financial establishments assess penalties for early prepayment. Apart from being more expensive, unsecured loans are less flexible than secured debt. Thus, they are a good solution for borrowers who are looking for short-term financing. Other types of unsecured debt include payday loans, medical bills, and credit cards.
Many banks in Canada offer unsecured loans. Bank clients in Halifax, borrowers in Vancouver, customers in Calgary, and in other locations can apply for unsecured loans. CIBC, for example, offers unsecured loans, which are a good solution for clients who seek quick access to cash. This type of loans allows for faster approval because clients of the bank are not required to offer collateral. At the same time, unsecured loans are more difficult to obtain because they are not secured by collateral, and a good credit score is required. The most common reasons why customers apply for CIBC unsecured loans are education costs, medical bills, home renovation projects, buying a car, and debt consolidation. Unsecured personal loans are an ideal choice for borrowers who need money for home renovation. Clients can complete projects that have predictable costs and can access funds fairly quickly. To borrowers who have outstanding debts, the bank recommends debt consolidation loans, which make it easier to manage the monthly payments. Debt consolidation loans are featured with lower interest rates than standard credit cards. Clients of other big banks can check for BMO unsecured loans, RBC unsecured loans, TD Bank unsecured loans, etc.
About 100,000 Canadians file a consumer proposal or declare bankruptcy every year. Persons who have overwhelming debt and financial difficulties often consider bankruptcy as their only solution. The most common causes to declare personal bankruptcy are: excessive student debt, loss of income due to business failure or job loss, and multiple debts from coping with prolonged serious illness or accident in the family.
Bankruptcy is not the only solution for debt-ridden borrowers in Canada. They can file a consumer proposal, opt for credit counseling or a debt management plan, or take a debt consolidation loan. The least extreme option is taking out a debt consolidation loan, followed by debt management and credit counseling. It is the responsibility of bankruptcy trustees to determine which option is best under certain circumstances. If all other options have been exhausted, declaring bankruptcy is the final option to deal with financial problems.
Bankruptcy provides certain advantages, and one is that it is relatively quick. Compared to other options, it is inexpensive and protects borrowers from wage garnishees, legal action, and collection action. Filing for personal bankruptcy makes sense when a borrower has multiple and excessive unsecured debts. One major disadvantage is that bankruptcy is a hard blow on the borrower’s credit history. When completed, the borrower’s credit history is reset to zero. The bankrupt has to keep detailed records of his/her expenses and income while in bankruptcy. He/she may be required to surrender some possessions as well.
Furthermore, certain debts are not erased in a bankruptcy. These include money owed for things stolen, maintenance and alimony payments, assets obtained by misrepresentation, fines imposed by the court, and student loans when the borrower has declared bankruptcy within 7 years or prior to completion of studies. Another exception is award of damages for sexual assault or inflicting bodily harm.
In view of property exempt from seizure, all territories and provinces have their own regulations regarding the assets borrowers can keep in a bankruptcy. Bankrupts in Newfoundland, for example, can keep heating and fuel, food, domesticated animals that are kept as pets, dental and medical aids, household furnishings and appliances, etc. Borrowers in Saskatchewan can keep different assets depending on whether they are farmers or non-farmers. Farmers in Saskatchewan are allowed to keep farming equipment and machinery, livestock, appliances, furnishings, tools and equipment, etc. Non-farmers can keep personal effects and household furniture, certain types of life insurance policies, equity in personal residence, and tools of the trade. DPSPs, RRIFs, and RRSPs are also exempt from seizure.
Counseling fees, filing fees, and trustee fees are regulated by the Canadian government. In case no assets are available, the trustee in bankruptcy will require the borrower to pay disbursements or trustee fees over time or will require a retainer. In simple cases, the amount to be paid is around $1,350 plus counseling costs and GST. Costs include administrative costs such as mailing costs, court fees, and government costs for filing.
Finally, persons who want to avoid bankruptcy can file a consumer proposal. Consumer proposals can be for a term of no more than 5 years and are available to borrowers with commercial or consumer debt up to $250,000. Division I proposals are different from consumer proposals in that debtors owing more or less than $250,000 can file a proposal. A division I proposal is an agreement between creditors and a debtor whereby the latter agrees to pay a portion of the outstanding balance as to avoid bankruptcy. The trustee in bankruptcy is tasked with making a proposal to the creditors. If the creditors agree, and the proposal is approved by the court, it becomes a binding contract. If the creditors choose to vote against it, the debtor is then bankrupt. Proposals are considered a better deal for loan providers and in most cases, they are accepted. Moreover, the filing of proposal acts to stop legal action contemplated or undertaken by creditors. This gives the debtor some breathing space so that they can explain their financial circumstances to the creditors and discuss their options.