What Do Bad Credit Lenders Look at When Assessing Loan Eligibility?

What Do Bad Credit Lenders Look at When Assessing Loan Eligibility?

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated October 18, 2022

Do you have bad credit? Bad credit can make it extremely challenging to get a conventional loan from a traditional lender.  However, that doesn’t mean that you can’t get a loan at all. In fact, there are lenders out there who specialize in loans for consumers with bad credit. These bad credit lenders offer loans to those with bad credit by assessing their creditworthiness using unconventional methods.

Find out what bad credit lenders look at when assessing your loan eligibility. 

Factors Considered By Bad Credit Lenders

The following factors are looked at by bad credit lenders when assessing borrowers’ ability to secure a loan:

Credit scores 

Even though there are bad credit lenders who loan out money to consumers with poor credit, they will still want to know your actual score. As such, one of the factors that will come into play when assessing a borrower’s loan eligibility is their credit score. Bad credit lenders will typically look at how borrowers tend to handle their finances, rather than placing so much focus on the credit score itself.

How Lenders May Use Your Credit History

While previous mistakes may have caused your credit scores to drop, bad credit lenders may put more emphasis on your more recent credit history. As such, if you’ve been recently making an effort to improve things your lender may take that into consideration.  Ideally, your lender will want to see a solid payment history in terms of a borrower’s financial obligations, such as mortgage payments or rent, credit card bills, and utility bills over the past couple of years. All of this may still hold a lot of weight in the loan application process.

How To Improve Your Score For Bad Credit Lenders

When done responsibly, these four techniques can help gradually increase your credit score:

  1. Paying your credit-related debts on time and in full for at least several months
  2. Keeping your oldest credit accounts active and paid, to build your credit history
  3. Having reasonable (ideally low) debt-to-credit (DTI) ratios
  4. Avoid applying for too many new credit products within a short period. 

Income

Your income level will always play a vital role during the lender’s underwriting process. Generally, the higher your income level, the higher the chances of getting approved for a loan. Lenders will assess your income in order to calculate how much you can borrow without being overwhelmed by debt. 

Debt-To-Income Ratio

When you apply for credit, lenders will assess your income and debts. They’ll use income and debt to calculate your debt-to-income ratio, which is the percentage of your monthly income that you have to use to pay off your monthly debts.    

Most lenders want to see a DTI ratio of no more than 30% – 36%, however, some lenders accept ratios as high as 50%. 

How To Lower Your Debt-To-Income Ratio

Before you apply for a bad credit loan, remember to pay off or reduce as many of your unpaid debts as possible. Start with any debts that are overdue, then work your way down to the largest and highest-interest ones to improve your debt-to-income ratio.

Employment history 

Since bad credit lenders don’t place as much focus on credit scores, they’ll want to make sure that you are financially stable. As such, they will want to look at your employment history. Lenders will look at how long you’ve been employed with your current company and what your status is with your employer. For instance, are you a full-time, permanent employee, a part-time employee or a contract worker? A full-time permanent employee will seem more financially stable than the other two positions. 

Assets

The more security you can offer your lender, the easier it is to qualify for a loan, especially if you have bad credit. That’s why some lenders will inspect your liquid assets when you apply in order to see if you have the means to repay your loan in the event your wages are cut due to job loss, illness or any other reason. 

Since liquid assets can be converted to fast cash and used to cover your payments following a financial emergency, bad credit lenders might be more willing to approve you for a decent loan and interest rate if you have some to offer.     

What Is Considered A High Liquid Asset? 

  • Savings or money market accounts
  • Certificates Of Deposit (CD)
  • Stocks
  • Government Bonds

Collateral

Lenders may also ask for security in the form of collateral, which they’ll then use to ‘secure’ your loan. Collateral must be a valuable fixed asset, like your car or house. If you miss too many payments, the lender can seize the asset to recover their losses.

How To Use Collateral To Get Approved For A Loan

When you take out a mortgage or car loan, the house and car act as collateral for the loan. As such, you don’t have to offer any collateral to secure these kinds of loans. However, if you’d like to get a secured personal loan, you’ll have to offer an asset of value to secure it. This can include your car, house or stocks. 

As mentioned, adding collateral can help you qualify for better loans and interest rates because it offers the lender security if you default on the loan. 

Co-Signer

Lenders may assess your cosigner’s creditworthiness if you apply for a co-signed loan. A cosigner acts as loan security for your lender because they’re agreeing to take over your loan payments when you can’t afford them. This helps make you more creditworthy, leading to better loan rates and conditions.   

How To Get A Cosigner?

Ideally, your co-signer should be a trusted family member or friend with a good credit score, stable income and reasonable debt levels. They must also know about the potential consequences of being a cosigner. If they become responsible for your loan, missing payments could damage both of your credit profiles.

Down Payment

If you’re applying for a car loan or mortgage, your lender will consider the amount you put down when assessing your creditworthiness. The larger your down payment is, the easier it will be to qualify for an appealing loan as it reduces the total loan amount owed. 

How To Save For A Down Payment

Saving for a down payment can be difficult, especially if you’re looking to put down 20% or more on a house. The best way to get started is by building your savings account and stashing away any spare cash you earn from tax refunds or windfalls. 

Who Are Bad Credit Lenders?

In Canada, bad credit loans are usually available through “alternative” lenders. These are private businesses that operate outside of traditional financial institutions, like banks and credit unions. So, they’re not as bound by provincial or federal restrictions and can set easier requirements for their loans, including the potential acceptance of bad credit. 

While rates and conditions vary from lender to lender, private loans function similarly to bank loans. However, bad credit lenders may charge higher interest rates to compensate for the extra risk they’re taking (by approving less creditworthy borrowers).  

Where Can You Find A Bad Credit Lender?

AmountAPRTerm (months)Type of Loan
FairstoneUp to $35,00026.99% - 39.99%6 - 60Secured & unsecuredMore Info
easyfinancialUp to $15,00029.99% - 46.96%9 - 60Personal loanMore Info
Mogo Finance$5,000 - $35,0005.9% - 45.9%12 - 60Personal loanMore Info
Borrowell$1,000 -$35,0005.99% - 29.19%36 - 60Persona loanMore Info
Loan AwayUp to $5,00019.9% - 45.9%3 - 36Personal loanMore Info
Lending MateUp to $10,00043%36 - 60Guarantor loanMore Info
514 LoansUp to $3,00022% - 35%3 - 4Installment loanMore Info
Refresh Financial$1,600 - $25,0009.47% - 20.07%36 - 60Secured Savings LoanMore Info
MarbleUp to $20,00019.44% - 31.90%36 - 84Consumer Proposal Exit LoanMore Info

What Documents Do Bad Credit Lenders Require? 

Although your lender might have other requirements, most bad credit loan providers will ask you for copies of these documents when you apply: 

  • Personal Identification Documents – You may need at least two pieces of government photo ID, such as your passport, driver’s license or health insurance card. For extra proof, bad credit lenders may also request your: 
  • Social Insurance Number (SIN)
  • Birth Certificate 
  • Certificate of Citizenship 
  • Recent Utility Bills
  • Income Verification Documents Lenders may request your latest pay stubs, bank statements, and tax returns to see if you pass their minimum income requirement. Since most loans are sent and repaid by direct deposit nowadays, they may also ask for a VOID cheque or pre-authorized debit form.   
  • Employer Verification Documents – Most lenders only require pay stubs and proof of direct deposit to verify your job and income. However, if you need a large loan, like a mortgage, they may require an employment letter.

Additional Documents Required For A Bad Credit Car Loan Lender

If you’re applying for a car loan, your lender may have to verify some extra documents and details about your car before they let you buy it, including:

  • The total purchase price
  • Your car insurance policy
  • A tax invoice (if you choose dealership financing)
  • Your car’s registration plates and Vehicle Identification Number (VIN)
  • The dealership or private seller’s contact information  

Is A Bad Credit Loan Right For You?

If you have a bad credit score and are having trouble getting approved for a conventional loan with a traditional lender, you have the option to deal with a bad credit lender. These particular lenders work closely with borrowers who have poor credit, in order to help them find a loan option that they feel comfortable with.

Then again, bad credit loans can have their own set of pitfalls that borrowers should be aware of before applying for one:

Interest Rates Are Higher

Generally speaking, interest rates attached to bad credit loans are higher than those with traditional loans. Bad credit lenders charge a higher rate because the risk is considered to be much larger with these types of unsecured loans.

Some Lenders Are Untrustworthy

While there are plenty of legitimate bad credit lenders out there, there are also those who are simply looking to scam unsuspecting borrowers. If you’re not careful, you could wind up in a worse financial position than you were in before taking out the loan. That’s why it’s so important to do your homework to make sure you’re dealing with a reputable lender.

The Cycle Of Financial Woes Could Continue

It’s easy to get stuck in a financial rut if you continue to take out loans to cover expenses. The best way to avoid this is by making all loan payments on time, or else the cycle of debt is sure to continue.

What Is A Bad Credit Loan?

Basically, a bad credit loan is designed for borrowers who have sub-par credit scores, which is generally anything under 600. If you have a bad credit score, you will be considered a high-risk borrower to traditional lenders because your score essentially reflects the likelihood that you’ll make your payments on time. As such, getting approved for a traditional loan would prove to be very difficult.

Benefits Of A Bad Credit Loan

A bad credit loan is a loan that is extended to borrowers who have a bad credit score. The advantages of a bad credit loan are obvious:

  • You don’t have to worry about your credit score
  • Loan approval is generally pretty quick
  • Funds are extended rather quickly
  • You can begin improving your credit

Bad Credit Lender FAQs

How to get a bad credit loan from an online lender?

The most important step to take is to find a reputable lender who offers a loan that meets your needs. Once you find the right lender, you’ll likely be able to complete their application from your home. Since you’re looking for a bad credit loan, you’ll likely need proof of employment or income, a bank account that accepts direct deposits, identification, and three months’ worth of bank statements.

Is a credit score of 600 bad?

A credit score off 600 does fall into the poor credit range. But, the good news is that there are many steps you can take to improve your credit. Furthermore, improving your score by 50 or 60 points will put you into the fair range and may make getting approved for new credit easier. 

What Is creditworthiness? 

Lenders and creditors use the term creditworthiness to represent whether or not a borrower is worthy of getting approved for new credit. If a borrower is creditworthy, they pose less of a risk to the lender than someone who is not creditworthy. Creditworthiness is measured by a number of factors, including credit scores, income, debt levels, down payment, cosigner, etc. 

Final Thoughts

Bad credit loans offer borrowers with poor credit scores an option when traditional lenders are not an option. If you’re responsible with your money and have found a reputable bad credit lender, taking out one of these types of loans can give you the financial help you need without making things worse.


Rating of 5/5 based on 9 votes.

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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