If you have bruised credit and are looking for financing, you may be considering a bad credit loan.
But if this is the case, you need to pay special attention to the types of loans available. Some aren’t as good as they appear to be.
A bad loan can:
- Leave you in debt.
- Force you to pay more than necessary in sky-high interest and fees.
- Make your credit even worse.
A good loan can:
- Help you erase debt.
- Have manageable payments on a fixed schedule you can live with.
- Help rebuild your credit.
Not all bad credit loans are the same. Here’s what you need to know about the different options available:
Personal Loans
- Payday Loans
Payday loans sound too good to be true — and that’s because they are. A payday lender will give you an advance on your next paycheque — up to $1,500. For each $100 that you borrow, they can charge you up to $15 in interest and fees.
They must be repaid in a short-time frame, normally 14-to-28 days (the exact schedule is up to the lender) but no more than 62 days after the loan is taken out.
Example:
If you borrowed $400 with $14 per $100 borrowed and had to pay it back in 14 days, you would have to repay $456. The equivalent annual interest rate is 365%.
Cautions:
- Payday lenders don’t report to credit agencies. Even if you pay off your loan in full and on time, it won’t help your credit score.
- Payday loan interest is sky-high compared to other lenders.
- There’s little leeway to develop a flexible repayment schedule.
- They are hard to repay. If you are in need of the $1,500 advance on one paycheque, will you have that amount by the next pay period, plus the funds you need for everyday living expenses?
- Personal Loans
A bad credit personal loan is often offered by a private financial institution. With this type of loan, you borrow a fixed amount of money and pay it back over a period of time. You must pay back the full amount, plus any interest or fees.
By law, lenders can’t charge more than 60% interest annually, including all fees, costs, and interest you’ll pay to get the loan.
Many lenders will offer a long-term, fixed interest rate loan repayment schedule that works with your budget. Most lenders report to the credit agencies in Canada, so if you make your payments in full and on time, this type of loan can help improve your credit score.
Cautions:
- Ask what collateral the lender requires. Some will require an upfront payment to get the loan — be wary of those. It is illegal for a company to promise to loan you money in exchange for a fee.
- Other lenders, like Prudent, offer bad credit personal loans based on your assets, for example, if you have home equity available or a paid-off car.
- Be careful not to borrow more than you can pay back.
- Make sure that the lender reports to the credit agency.
Mortgage Financing
If you have bruised credit, you may be looking for mortgage financing — either for refinancing your current mortgage or obtaining a first or second mortgage.
With Canada’s new mortgage rules, you may not qualify for financing at a big bank, which might mean looking to alternative lenders. This can be a great option, but as with personal loans, there are considerations to make.
- Loan Sharks
You may have heard the term “loan shark” before — typically meaning a moneylender who charges extremely high interest rates, perhaps even under illegal conditions.
Watch out for:
- Clauses that state the only way you can break your mortgage is by selling your home (a sale-only clause).
- Research reputation before seeking mortgage financing. Make sure that they are an established lender with a solid reputation.
- Ask your lender what will happen if you default on a payment.
- Extremely high fees or interest rates — compare prices to see what you might expect.
- Mortgage Financing Through Financial Companies
Another type of alternative lender is a financial company, like us here at Prudent Financial.
Typically, these companies lend to people with bad or bruised credit and have an established reputation and process. They are also likely to have established mortgage product offerings and will be able to walk you through the entire process.
Look for:
- Positive online reputation and reviews.
- A free consultation.
- Established experience and years in business.
- If they are a mortgage broker, make sure they are licensed.
At Prudent Financial, we offer personal loans and mortgage services to people with good credit, bad credit, and everywhere in between. For personal loans, we require 50% equity in your home or a paid-off vehicle that is less than six years old.
If you are interested in a personal loan, call 1-888-852-7647 or visit www.prudentfinancial.net.
For our mortgage financing options, contact Prudent Mortgage today to speak with our experienced mortgage broker Jonah Stern. Call 1-888-852-7647 ext. 229 or apply online at www.prudentmortgage.ca.