Should I pursue a no-credit-check loan?

28 January 2015 by National Bank

With the onset of the financial crisis still fresh in mind, many Canadians are still recovering from financially-troubled times that have seen their credit ratings suffer. At the same time, hundreds of lenders have entered the fray, hoping to capitalize on people’s needs. In order to address the needs of those whose credit has suffered, many lenders now extend loans without credit checks, but they can be costly.

Many consumers whose FICO scores don’t qualify for traditional institutional loans can now access a variety of personal loans without credit checks. These loans will inevitably come with significantly higher interest rates, but they may be a last resort for families in need of some extended credit while they try to get back on their feet. Consumers can now access no-credit-check loans online that range between $100 to $1,500, with varying interest rates, flat fees or sliding scales. The terms of these types of loans can range from as little as 10 days to up to 6-12 months. However, the longer the term, the more expensive the loan will be.

Consumers beware

“To be honest, I wouldn’t recommend that type of loan, because the interest rates are too high and, if you miss a payment, it will grow higher,” warns Philippe Archambault, Product Officer, Financing solutions at National Bank. “In fact, the rates are at least double that of a traditional loan and you can also encounter additional transaction fees and service charges.”

One example of these types of loans is what is known as a “payday loan”, which can be covered by collateral or via commitment of a direct deposit pay. The problem is that these loans can end up costing as much as 600% when the term is complete, given sky high interest rates and processing fees of as much as $9.50 for every $50.00 borrowed. There could also be additional charges and fees relating to things like deferred payments, late payments and term extensions.

Canadian regulations

In Canada, payday loans are permitted, however the government has limited interest rates to a maximum of 60%. In Quebec, however, government legislation restricts interest rates to no more than 30%, which effectively eliminates that market altogether.

“If you are in a tough situation, I would first recommend looking at the possibility of consolidating your debts, rather than opting for a high interest loan like that,” suggests Archambault. “Banks offer consolidation loans, while bankruptcy professionals can also review your situation and advise you on the best plan of action for your unique situation.”

Reviewing your options

Archambault also suggests a careful evaluation of your credit score before opting for no-credit-check loans, as you may qualify for a conventional loan with a lower interest rate, or even a higher-interest traditional loan that offers greater consumer protection.

For more information on credit and debt management visit the Financial Consumer Agency of Canada

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