Alternative Lenders:
Explained

An alternative lender is an inclusive loan provider, offering loans to those who have a credit score below 720, and who have been denied by traditional lenders. They provide greater flexibility on loan requirements, including credit score, history and annual income, and because of this, interest rates are higher. Alternative lenders use a risk-adjusted rate system, which allows them to lend to higher risk, non-prime borrowers. The CLA’s alternative lenders also report loan repayments to the credit bureaus, meaning consumers have an opportunity to rebuild their credit and eventually upgrade to lower rates.

Payday lenders offer short-term loans with annual interest fees as high as 400% APR, which make them the most expensive option for accessing credit. Payday lenders expect the loan to be repaid from your next pay cheque. In most of Canada’s provinces, you have up to 62 days to pay back a payday loan. If you can’t pay back on time, you will face more fees and additional interest charges.

Alternative lenders are regulated through the Criminal Code and applicable provincial consumer protection legislation. They make up the middle market for lending, offering loans with interest rates up to a maximum of 47% APR.

Payday lenders are exempt from the Criminal Code maximum rate of interest and charge interest rates as high as 400% APR. They are regulated through payday legislation provincially.

Alternative lenders offer installment loans, which give people enough time to repay the loan and makes the repayment affordable. Payday loans must be repaid within 62 days.

Alternative lenders can help consumers rebuild credit by reporting their customers’ repayments to the credit bureau. Payday loans do not offer Canadians a chance to rebuild their credit and move up to prime interest rates, leaving those who use payday loans stuck in a debt-cycle. For more information on the many differences, click here.

Over 8 million everyday Canadians are considered non-prime, meaning they have lower credit scores and will struggle to access credit from a traditional financial institution.

These Canadians need access to credit for everyday expenses, and alternative lenders provide flexible terms and manageable repayment schedules.

Our research through Pollara Insights shows that non-prime Canadians borrow primarily to pay the bills (53%); for essential expenses (39%); home and auto repairs (28%) and to consolidate debt (24%).

Non-prime Canadians with credit scores below 720 will likely struggle to access credit from traditional financial institutions. There are over 8 million Canadians that are non-prime.

A non-prime credit score is a credit score determined by the credit bureau to be below 720. Under this umbrella, a sub-prime credit score is a credit score of 660-720. These scores are determined by the leading credit bureaus in Canada.

Credit scores indicate the likelihood of a customer defaulting on loan repayments, based on past repayment behaviour. Lenders use a risk-based method when deciding to extend credit and calculating interest rates: the more risk the lender takes, the higher the cost of interest on the loan (up to the maximum allowable rate of interest of 47% APR) to account for the higher risk for default. With every repayment of a CLA alternative loan, the customer’s credit score improves. Over time, and with steady repayment history, non-prime borrowers are offered lower interest rates.

Canadians who have a non-prime or sub-prime credit score, and in some cases no credit history, can benefit from alternative lenders. By obtaining a loan from an alternative lender and making timely repayments, these Canadians can rebuild their credit and qualify for lower rates.

If the maximum allowable rate of interest is lowered, significantly less Canadians will have access to the credit they need. This is because alternative lenders take on more risk when lending to non-prime borrowers. Lowering the maximum allowable rate of interest will effectively shut out a large portion of the population from the lending market, making it difficult for non-prime Canadians to rebuild their credit scores or accomplish their financial goals.

The maximum rate of interest is set out in the Criminal Code. In addition, alternative lenders are regulated by provincial consumer protection legislation.

If the maximum allowable rate of interest is lowered, millions of Canadians will be completely shut out from accessing credit for critical expenses. Limiting access to credit at a time of high inflation will further strain the ability of non-prime Canadians to make ends meet when unexpected expenses come up. According to our research, 59% of non-prime Canadians would be unable to pay for an unexpected $1,000 expense with readily accessible funds. They would have to borrow, sell personal belongings or dip into retirement/education savings in order to cover the expense.

Removing access to credit will not remove the need for credit. It will simply drive non-prime Canadians to desperate measures to access credit, such as borrowing from payday lenders, pawnbrokers or even illegal lenders.

Our research shows that close to three-in-ten (28%) Canadians who borrowed from alternative non-prime lenders last year and nearly half (47%) of those who borrowed from payday lenders last year have thought about going to an illegal loan shark. 62% of non-prime Canadians would worry if the government restricted the ability of lenders to offer loans to people with low credit scores.

Furthermore, without access to credit, the consumer simply cannot rebuild their credit. Improving a low credit score is almost impossible if a person is not given an opportunity to borrow and repay credit, as the repayment of credit is the main driving force behind credit scores. Our research shows that 90% of non-prime Canadians say they want to improve their credit score.

At this time of record-high inflation, with Canadians struggling with affordability, limiting access to credit will marginalize 8 million-plus non-prime Canadians by limiting their access to the credit they need and pushing them into the arms of payday lenders, or worse.