5 Loans for Senior Citizens with Bad Credit in Canada

Whether planning your dream holiday abroad, purchasing a new vehicle, or redecorating your home, there are plenty of reasons to apply for a loan as a senior, even when you have a bad credit score. However, if you’re retired, it’s normal to be worried about the financial feasibility of such a thing. Can you afford to repay on time, factoring in interest rates? Will you be able to pay it off within your life so your estate won’t have to cover it?

These are just some of the questions Seniors’ Lending Centre clients ask themselves. The good news is that there’s an ideal loan for everyone. And yes, that includes loans for senior citizens with poor credit. There’s no need to miss out on new adventures!

Today, let’s spotlight all the options available to you.

Home Equity Loans

As the term implies, these personal loans allow you to borrow against the value of your home, otherwise known as equity. Therefore, you don’t need to worry about the bank checking your employment status, history, or credit score. Depending on the loan in question, you may be able to take out as much as 75% of the home’s appraised value. You can even do this if you have an existing mortgage, allowing you to take advantage of the lower rates while repaying in a shorter timeframe. This is also known as a short-term second equity loan.

Pros 

• Home equity loans primarily rely on the equity in the home rather than your credit history. This allows those with bad credit to still qualify and obtain the funds they need. 
• You have the freedom to use the loan however you see fit, whether you want to consolidate debts, cover medical expenses, or make home improvements. 

Cons

• Borrowing against your equity means that you may lose a significant amount of it over time if you don’t keep up with payments.
• Equity loans are offered by private lenders and your interest rate will be higher than regular qualifying bank mortgages, and they might charge fees.
• The loan amount available depends on the equity you have. Therefore, it may not be enough to cover the full amount you require.

Getting a Home Equity Loan

1. Property appraisal and loan evaluation: Lenders will assess the value of the home through a professional appraisal to determine the maximum amount that can be approved.
2. Application: You’ll need to complete the loan application and provide information on income and property ownership.
3. Loan terms and conditions: Once approved, you’ll get the terms and conditions, including the interest rate, repayment period, and any associated fees.
4. Access the funds: After accepting the terms, you will receive your approved loan amount as a lump sum.

Interest-Only Loans

Interest-only home equity loans offer more affordable monthly payments at a fixed rate – the principal balance won’t change. In essence, home equity loans of any sort are great for accessing cash in a lump sum, so long as you have the income to pay it off in a timely manner while meeting all monthly payment deadlines. 

Pros

• You’re only required to make interest payments for a specified period. This can provide relief for those who face financial constraints.
• By temporarily reducing the monthly payment burden, you can allocate your funds toward other expenses, debts, and financial priorities.

Cons

• After the initial interest-only period ends, the loan typically transitions to a fully amortizing loan, requiring larger monthly payments that include both principal and interest.
• During the interest-only period, the principal balance remains unchanged, and interest continues to accrue. As a result, the total interest paid over the life of the loan may be higher than traditional loans with immediate principal payments.

Generally, the process for securing an interest-only loan is the same as other home equity loans.

Home Equity Line of Credit (HELOC)

A home equity line of credit, otherwise known as HELOC, is similar to a home equity loan in that you can borrow against the appraised value of your property. However, that’s where the similarities end – you need to qualify based on a number of factors, including your employment history, credit score, and income and debt ratios. You can only borrow up to 65% in this case, and the minimum monthly payment is only the amount of interest (usually Prime plus .50-.75%).

Pros

• HELOC is one of the better loans for seniors with limited cash flow, as there’s less financial risk if you’re stretching your budget. 
• You have the ability to combine this credit with an existing mortgage on your home.
• Instead of a lump sum payout like with a conventional home equity loan, a HELOC acts like a student loan or credit card account in that you can withdraw from the available amount as you see fit – a great option if you don’t intend on spending it all at once, as you only pay interest on the withdrawn amount. 

Cons

• Since a HELOC is secured against the home, defaulting on repayments can put you at risk of losing your property and the equity built over the years.
• HELOCs often come with variable interest rates, which means that interest payments can fluctuate over time.
• Those interest-only payments do mean that you aren’t paying down the principal.

Process of Getting a HELOC

1. Application: The application process involves providing necessary documentation, like proof of income, property valuation, and credit history.
2. Stress test: As part of your evaluation, lenders may also conduct a “stress test” to determine your ability to handle potential interest rate increases in the future.
3. Approval and setting a credit limit: Upon successful evaluation, you’ll get approved, and the lender will establish a credit limit based on your financial profile and the value of the home.
4. Accessing funds: Once the HELOC is in place, seniors can access funds as needed, either through checks, a credit card, or online transfers, up to the approved credit limit.

Refinancing

Refinancing is securing a new loan with more favourable terms. It works much the same as a HELOC in that you need to qualify in the same areas, but you’ll be given a lump sum and 25 to 30 years to pay it off. In addition, you can borrow against up to 80% of your equity, so more funds will be immediately available to you at once if you do get approved. Due to the time you have to pay it off, interest is considerably lower in most cases.

Pros

• Refinancing provides an opportunity to secure a newer loan with lower interest rates, which can result in significant savings.
• It’s also possible to negotiate lower monthly payments.
• Refinancing allows homeowners to consolidate their debts, including high-interest credit card debt or personal loans, into a single, more manageable monthly payment.

Cons

• Lenders typically consider credit history, income stability, and loan-to-value ratio. While not impossible, seniors with bad credit may face more difficulties qualifying.
• Refinancing may involve certain costs, such as closing costs, appraisal fees, and application fees.

Securing Refinancing

1. Evaluate your current mortgage terms: This includes interest rates and the remaining balance to determine if refinancing could be beneficial.
2. Research and compare lenders: You can also enlist the help of a mortgage broker to do this work on your behalf.
3. Apply: The refinancing application requires income verification, asset statements, credit reports, and property valuation.
4. Appraisal: The lender will typically conduct an appraisal to determine the property’s current value.
5. Approval: If approved, you can negotiate the terms of the refinanced loan, including interest rates, loan duration, and repayment terms.

Reverse Mortgage

Reverse mortgages allow homeowners 55 and older to access a portion of their home’s value, providing a flexible source of income during retirement years. While your credit does play a role in reverse mortgage approval, these types of loans typically do not require very high scores because the amount you get is also based on factors like your age, personal debt and the house’s appraised value.

Pros

• Capable of accessing funds despite a bad credit rating.
• Improve financial stability to help you meet your financial obligations and cover necessary expenses.
• No monthly payments, unlike traditional loans.

Cons

• The amount you can access might be quite limited, if you are a ‘young’ senior.
• Over time, the interest on the reverse mortgage accrues, potentially reducing the equity left for seniors or their heirs.
• Rates are slightly higher than regular income-qualifying mortgages.

Process of Obtaining a Reverse Mortgage

1. Research and seek advice: Understand the eligibility criteria, terms, and conditions of different lenders. Or, seek guidance from a reverse mortgage broker who can outline all the details.
2. Application and assessment: This process includes a comprehensive look at your property’s value and financial situation.
3. Approval and disbursement: Once approved, you will get the loan proceeds according to your chosen payment method.

Need a hand with determining which type of personal loan is best suited to your needs, financial status, or credit history? The Seniors’ Lending Centre team is here to help! Contact us today for a free, no-obligation quote and to get in touch with one of our reverse mortgage lenders.