Navigating loan options can be challenging for everyone but it can be especially tough for seniors with bad credit.
In this article, we will look at 9 loan options available for seniors in Canada, and focus on options for homeowners over the age of 55. As experts in loans, credit matters, real estate, mortgages and law, we at RetireBetter are here to guide you through this difficult topic.
- Seniors with bad credit will have difficulty qualifying for mortgages or HELOCs because of traditional income and credit rules
- Seniors should always be careful when considering private mortgages or payday loans
- Reverse mortgages are often the best option for seniors with bad credit who are looking for a loan
Understanding Credit and Its Impact on Seniors
Credit scores play an important role in determining a borrower’s loan eligibility.
Every lender will check your credit score and payment history when you apply for a loan and use it to determine how risky of a borrower you may be.
What is Bad Credit?
Since all lenders have their own policies about credit, there is no universally accepted rule about what is considered “bad” credit. Generally speaking, and in our experience, you will be considered to have bad credit if your credit score on your credit bureau is lower than 600. Even if you have a higher score, if your credit bureau is reporting a history of payment issues, then a lender may still decide you have bad credit.
Why do Seniors Have Bad Credit?
Seniors may have bad credit for any of the following reasons:
- late payments on their existing debts
- Collections or judgements
- Carrying high balances on accounts
- A previous bankruptcy or consumer proposal
- A lack of recent credit activity
If you have a low credit score, you may not qualify for some loans or, even if you do qualify, the lender may charge you higher interest rates because they see you as a riskier borrower to lend to.
So what are your loan options if you are a senior with bad credit? We’ll start by looking at secured loan options (meaning you have provided collateral for the loan), followed by unsecured loan options (no collateral given to the lender).
Secured Loan Options
If you are a senior with bad credit, the first option you should start thinking about are secured loan options. Secured loan options should be considered first because they will have the lowest interest rates and can have more manageable monthly payments for seniors.
If you are looking for a large loan (typically over $50,000) and the lowest possible monthly payment, then you should start by looking at your mortgage options.
Here are the different types of mortgages available, with their individual set of requirements and benefits. All of these mortgage options are available at fixed or variable interest rates.
Debt Consolidation Mortgages
Debt consolidation mortgages allow seniors with bad credit to consolidate their high interest debts into a single, lower rate loan with a more manageable monthly payment. The overall benefit of a debt consolidation mortgage is that you will pay less interest over time.
The income requirements to qualify for a debt consolidation mortgage can vary, but you will always need a steady source of monthly income (either from a job or your pension) in order to qualify. The amount of income you are receiving is very important too.
A lender will want to make sure you could pay your debt consolidation mortgage payments and still have enough left over every month to pay your other bills. The documentation required to get approved for a debt consolidation mortgage is the same as any mortgage: you will need to show proof of income and home ownership.
As far as cost of borrowing is concerned, a debt consolidation mortgage is your best bet. However, you will typically need to borrow at least $50,000 and will start paying interest on the mortgage as soon as you receive the funds. If you don’t need all the money at once or need less than $50,000, a home equity line of credit may be a better option.
Want to learn more about debt consolidation mortgages? Reach out to us and we’d be happy to give you more information.
Equity Take Out (ETO) Mortgages
Here is a quick explanation of home equity:
Equity is the difference between your home’s value and the amount of any home loans you currently have. If your home is worth $300,000 and you have a $100,000 mortgage, that means you have $200,000 in home equity. If you are mortgage-free, then you have $300,000 in home equity.
If you do not have any debts to consolidate and wish to get a loan, then a ETO mortgage allows you to get a loan secured by the equity in your home.
An ETO mortgage has the same requirements as a debt consolidation mortgage, namely proof of income and a credit check. Many seniors who have bad credit are still able to qualify for an ETO mortgage, although the interest rates may be higher than expected.
The interest rates on an ETO mortgage are the same as interest rates on a debt consolidation mortgage but are generally lower than unsecured loans, and the loan can be used for any purpose, providing flexibility for seniors.
If you are a senior with bad credit looking for a loan more than $50,000, and you don’t have other debts to consolidate, then you should consider an ETO mortgage as one of your top options.
Want to learn more about ETO mortgages? Reach out to us and we’d be happy to give you more information.
In Canada, if you need a mortgage but cannot get approved by a bank, a credit union or any other financial institution, you can still get a mortgage from a group of lenders known as “private lenders”. Private lenders could be individuals or small companies providing mortgage loans. You can find a private lender by working with a mortgage broker.
Private mortgages are much easier to qualify for than loans from banks. Many private lenders will approve your loan by looking at the amount of home equity you have rather than your income. The document and credit requirements of a private mortgage are usually very easy to satisfy.
Seniors with bad credit looking for a loan should be very careful if considering a private mortgage. The Interest rates and fees on a private mortgage can be very high and the loan must usually be paid off in 1 year.
If you are thinking of getting a private mortgage, make sure you are working with an experienced mortgage broker who will structure the private mortgage so you can pay off the loan in a way that you are comfortable with. If you are not careful, you may be forced to sell your home in order to repay your private mortgage loan.
At RetireBetter, we are licensed mortgage brokers who can advise you on the suitability of private mortgages. For a no-obligation, stress-free consultation about private mortgages, feel free to contact us.
If you are a senior with bad credit, cannot get approved for a mortgage from a bank but do not want to get a private mortgage, then you should strongly consider getting a reverse mortgage.
A popular option among seniors is the CHIP Reverse Mortgage, which allows homeowners over 55 to convert part of their home equity into tax-free cash, without requiring monthly mortgage payments. Equitable Bank has also become a recent provider of reverse mortgages in Canada.
Learn more: How Does a Reverse Mortgage Work in Canada?
Reverse mortgages have very low income requirements since you do not need to make repayments. With a reverse mortgage, you only need to be able to pay your property taxes, home insurance and be able to maintain your property.
You can use the money from a reverse mortgage for any purpose and you can receive the money lump-sum or in monthly installments. The loan does not need to be repaid until you sell your home, move out or pass away. Reverse mortgage interest rates are higher than debt consolidation mortgages or ETO mortgages but less than private mortgages. Seniors with bad credit looking for a loan may not think of reverse mortgages as a good option but we think they should be given serious consideration.
You can easily find out how much money you could qualify for by using our popular free Canadian Reverse Mortgage Calculator.
If you are looking for a loan option that is less than $50,000 and still offers low interest rates, then you should consider a home equity line of credit.
Home Equity Line of Credit (HELOC)
A HELOC allows homeowners to borrow against their home equity. It's a flexible option but risks the home if payments aren't made. Unlike a mortgage, a HELOC works more like a credit card where you can borrow money as needed. Interest is only charged on the amount you borrow.
The income requirements to qualify for a HELOC can vary, but you'll typically need a steady source of monthly income (either from a job or your pension). The amount of income you are receiving is very important too.
A lender will want to make sure you could pay your HELOC payments (assuming you have used your full loan limit) and still have enough left over every month to pay your other bills. The documentation required to get approved for a HELOC is standard: you will need to show proof of income and home ownership.
Interest rates for HELOCs are generally lower than for unsecured loans but are higher than regular mortgage rates. Payments are based on the amount borrowed and the current interest rate.
A HELOC can be very suitable for a senior with bad credit as it will allow them to pay off high interest rate debts and lower their overall monthly payments. This lower payment will allow them to pay off their overall debt faster.
HELOCs are also very suitable for seniors with bad credit scores because the HELOC can act as a safety net, and allow seniors to pay for unexpected debts without resorting to expensive loans or taking cash advances from their credit cards.
Secured Credit Cards
If you are a senior with bad credit and need a loan for a smaller amount, then you should consider getting a secured credit card. Secured credit cards require a security deposit, which sets the credit limit and allow you to rebuild your credit score with regular repayments.
The income requirements vary, but you'll typically need a steady source of income. The application process will require you to provide proof of income and identity.
Interest rates for secured credit cards are generally higher than for mortgages but lower than unsecured credit cards. Payments are based on the amount spent and the current interest rate.
This option can be suitable for seniors looking to rebuild their credit but probably won’t be useful to seniors looking for a loan since they require a security deposit before they can be used.
Unsecured Loan Options
Credit cards offer convenience but high-interest rates can make loans grow quickly if monthly payments are not. Income requirements for credit cards vary, but you'll typically need a steady source of income. Documentation required includes proof of income and identity.
Interest rates for credit cards are generally higher than for secured loans. Payments are based on the amount spent and the current interest rate.
This option can be suitable for seniors looking for flexibility, convenience and small loan amounts. Seniors with bad credit should still be able to get approved for a credit card.
Personal loans provide lump-sum funds that can be used for various purposes. Personal loans are also known as unsecured lines of credit or unsecured term loans.
They usually have fixed interest rates but can be harder to qualify for with bad credit. Income requirements vary, but you'll typically need a steady source of income since you are not providing any collateral to the lender.
Documentation requirements for personal loans are usually proof of income and identity. Interest rates for personal loans are generally higher than for secured loans. Payments are based on the loan amount, interest rate, and loan term.
Personal loans are good options for seniors with bad credit if they can qualify for the loan.
Payday loans are short-term loans with high fees. They're an expensive form of credit and should be used as a last resort. Income requirements vary, but you'll typically need proof of regular income. Documentation required includes proof of income and a bank account.
Interest rates for payday loans are significantly higher than for other loan types. Payments are typically due in full within 30 days. Payday loans are generally not suitable for seniors with bad credit, due to the high borrowing costs and short repayment period.
Identifying and Avoiding Loan Scams
Seniors with bad credit are often targeted by loan scams. Be wary of lenders who guarantee approval, ask for upfront fees, or have unclear terms and conditions.
We would always recommend you check the reviews of a lender before proceeding with a loan application. We strongly recommend you work with licensed advisors and get independent legal advice from a lawyer who is not connected with the lender or anyone else in the transaction.
Learn more: What Seniors Should Know About Fraud
It’s not the end of the world if you are a senior with bad credit and need a loan. From our discussion, you can see there are many loan options for seniors with bad credit. No matter which option you select, making an informed decision is important.
Before you decide to take out any type of loan, always consider the costs, terms, and potential risks before choosing a loan. As you get older, your financial health will be important, and making an informed decision when you get a loan can lead to a more secure future.
Frequently Asked Questions (FAQs)
- Can I get a secured loan if I do not own a home?
You cannot get a mortgage, a HELOC or a reverse mortgage unless you own a home. You can get a secured loan if you can give a lender acceptable collateral, such as a car or stocks.
- Will I still own my home if I get a reverse mortgage?
Yes, you will continue to own your home if you get a reverse mortgage. The reverse mortgage lender will register a lien against your home, just like a regular mortgage. You can live in the home for as long as you wish.
- What is a no payment mortgage?
A no-payment mortgage is a mortgage that does not require monthly payments to be made by the borrower. The interest is either added to the loan balance every month or was deducted from the loan proceeds at the time of advance to the borrower.