3 Types Of Loans You Should Avoid

3 Types Of Loans You Should Avoid

Written by Chrissy Kapralos
Fact-checked by Caitlin Wood
Last Updated March 30, 2022

Most people will need to borrow money at one time or another, even if they have a steady income. Unexpected medical, moving, or emergency expenses, for example, can all require you to come up with money that you don’t have. There will be times when you won’t be able to say no to a loan, even if it costs you a high-interest rate or collateral. However, you have some flexibility in the type of loan you choose. No matter your situation, there are certain loans that you should steer clear of as much as possible.

What Makes A Loan Risky?

All loans will cost you something, whether it’s interest, fees, or other specific factors based on your contract. Here are a few things to consider when evaluating a loan:

High-Interest Rates

Depending on the lender and your financial situation, interest rates can be reasonable or astronomical. Interest is more than just a certain percentage of the money borrowed each month – to evaluate it properly, it’s important to calculate how much interest you’ll be paying over the course of your loan’s term. Additionally, you’ll want to assess your APR, or annual percentage rate, which is often higher than the interest rate. APRs include other fees determined by your lenders, like broker and closing fees. 

High and/or Hidden Fees

Many lenders and brokers have high annual fees, and they are not always obvious when you first look at an agreement. Calculate the impact of a loan’s fees into your monthly payments to assess whether or not it’s worth it. 

A common fee added by lenders is the loan origination fee. Find out how much loan origination fees can add to your cost.

Extremely Short Repayment Terms

The shorter the term, the less time you have to pay back your loan. When deciding on a loan, make sure you assess your monthly costs if the term is short. The last thing you want is to take out another loan to cover the cost of the first if your repayment period is too short. This traps you in a debt loan cycle, so it’s worth giving yourself extra space in your loan term.

Loans with High Risk

Many lenders will try to minimize their risk in lending to you, especially if you have poor credit. One way lenders minimize risk is by requiring collateral on their loan. Make sure you’re confident in your ability to make your loan payments before agreeing to a loan contract that requires collateral. You risk losing your collateral, like your home or car, if you cannot repay the loan. 

Check out the drawbacks of getting a cosigner for a loan.

Top 3 Worst Loans in Canada

When shopping for loans, there are many options giving you the ability to compare multiple lenders and agreements. You won’t always be able to escape a high-interest rate or short repayment term, but you’ll want to avoid these kinds of loans at all costs:

Learn more about which loans to avoid in Canada.

Payday Loan

Payday loans are a common form of financing for many credit constrained Canadians who need quick access to cash. The name itself sounds harmless – a quick, short-term loan to help you make ends meet until payday. Often described as predatory, payday loans will charge the absolute highest interest rate legal in the province the lender operates in. For example, an ad for a $300 payday loan will often be marketed as a low price of $63. However, if you do the math, that’s a whopping APR of almost 500%. The convenience and clever marketing often hide the true cost of a payday loan, making them appear less predatory than they are. Avoid these at all costs. 

Check out how much payday lenders are allowed to charge you by province

Cash Advance

A cash advance is taking out cash from an ATM using your credit card. Taking out a cash advance results in high-interest rates implemented immediately, which only subside once you pay off the rest of the balance. The cash advance feed and consequent ATM bank fee also get tacked on to your overall cost. 

Auto Title Loan

Auto title loans are loans that require you to put up your car as collateral. With interest rates at almost 25% per month, auto title loans are one of the most expensive forms of credit. They are also short-term loans, and often have hidden fees. The worst part is that you must give up your car in the event that you cannot make your loan repayments

What Can You Do If You Need Cash Quickly?

There are a number of alternative lenders in Canada who offer more affordable rates and terms than payday lenders. While you may not receive the funds the same day, you can usually find lenders who can fund you within 2-3 days. Moreover, these lenders base their approval on more than just your credit score, making it ideal for those with bad credit. Typically, income, debt-to-income ratio and employment stability are used to asses eligibility for the loan.

Alternative Lenders

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 - 60 Guarantor loanMore Info

Frequently Asked Questions

What’s the maximum interest rate I can be charged in Canada?

According to the Criminal Code of Canada, lenders cannot charge an annual interest rate of more than 60%. Interest rates higher than that are considered a criminal offence.

Can I get a personal loan with bad credit?

Yes, many alternative lenders offer personal loans to consumers with bad credit in Canada. As mentioned these lenders use your income, debt-to-income ratio and your overall financial health to assess your eligibility. As such, even if you have bad credit, you can still get a loan if you meet these criteria.

Is it better to get a payday loan or go into overdraft?

Depending on the type of chequing account you have, you could use up to 2,500 to 5,000 in overdraft. However, it’s important to remember that while overdraft protection only costs around $5 a month, overdrawn funds charge interest rates that are usually higher than regular loans or credit cards.

Final Thoughts

If you have poor credit or a blank slate of credit history, there might be times when you’ll feel desperate enough to explore a payday loan, cash advance or auto title loan as a quick fix for cash. However, you shouldn’t use these loans if you can help it, as the costs and risks are higher than any other loan. You should only use them as a last resort and rely on any other option, even borrowing from family or friends, before considering these loans.

Rating of 5/5 based on 3 votes.

Chrissy is a Toronto-based communications advisor. With an English degree from the University of Toronto and editing courses under her belt from Ryerson University, she has continued her lifelong passion for writing and editing. In addition to working for Loans Canada on a variety of financial topics, Chrissy has a few years of resume writing and editing under her belt, and takes great pleasure in helping people find work that fits with their experience and passions. When she isn't working, you can find her practicing yoga, hanging out with her dog, reading up on financial and real estate news, or planning her next trip abroad.

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