Use Alternative Loans Wisely: Diverse Applications For When You Really Need Them

By Maude Gauthier | Published on 17 May 2024

In collaboration with Créditmatik

Sometimes, the traditional banking system can’t meet our borrowing needs. Alternative loans offered by non-banks therefore become an interesting option. They can provide people with temporary financial relief – they are designed for short-term use. In the vast majority of cases, if you qualify for a traditional loan, opting for the traditional loan will be more beneficial to you. However, in certain situations, an alternative loan may be a wise choice.

[Offer productType=”OtherProduct” api_id=”6654b8321688eb5e5db5df1e”]

Paying for Living Expenses

What would happen if you lost the Internet because you can’t pay the provider? Maybe your kids use it to do homework, and you use it to work. In Canada, even people with decent jobs are struggling to make ends meet: A growing number of people aged 35 to 65 are missing their credit card payments, according to Equifax

Taking out an alternative loan could help you keep the Internet. On your next payday, you’ll repay the loan in full, plus accrued interest and applicable fees. Créditmatik, for example, offers a rate of 18.99% for fast credit solutions of up to $1,500 on the same day.

In many cases, credit solutions like those offered by Créditmatik fill a gap. People with poor or no credit score, such as those with high debt levels or newcomers to Canada, often don’t have access to credit cards and loans offered by banks. Self-employed people who declare low incomes due to business expenses may also encounter certain pitfalls in their search for credit. 

Just because you’re in one of these situations doesn’t mean you don’t have bills to pay! Alternative lenders’ interest rates may be higher than traditional lenders’, but your bills will be paid on time. To be safe, make sure you get a loan under a contract that complies with provincial guidelines.

Compensating for a Temporary Loss of Income

A series of misfortunes often causes financial difficulties that can make access to traditional credit impossible. Some industries are going through turbulent economic times and have to lay off part of their workforce. If your finances are tight, it’s highly likely that job loss would cause enormous stress in your household.  

In addition to layoffs, illness sometimes forces people to take an extended break from work. In many cases, this also means additional care costs. Whatever the reason for your reduced income, a credit solution like the one offered by Créditmatik can help you pay for certain expenses, from electricity bills to physiotherapy sessions.

But be careful. Are you sure you’ll be able to pay it back? In the case of loans taken out to compensate for loss of income, 70% of people have difficulty repaying them. To prevent the financial worries associated with illness, you may want to consider taking out disability insurance first.

Debt Consolidation

Imagine if you had three credit cards and were struggling to make the minimum payments each month. This is the type of situation that brings people to consolidate their debts. They combine them into a single loan to make repayment easier. This solution will work best if you find a personal loan with an interest rate lower than that of credit cards (usually around 20%). 

You can then use this loan to pay off the entire amount owing on your credit cards. Then, get rid of these cards to avoid falling back into the vicious circle. Instead, get a prepaid card for those times when you need a 16-digit number to pay for your purchases.

Building Credit

When you pay off a debt, whether it’s traditional or alternative credit, the lender notifies the credit-reporting agencies Equifax and TransUnion. If you pay everything you owe on time, the information transmitted will be positive. This will help you build or improve your credit score in Canada. Be aware that failing to repay your debts will have a negative impact on your file.

Your credit score fluctuates according to your repayment habits. Having a variety of debts and paying them off on time are all part of improving it. Building your credit will take a few months, if not longer. Don’t expect miracles! A better credit score will eventually give you access to traditional loans.

Buying High-Value Assets

Your car broke down, but you can’t qualify for financing on the new model you want? Many alternative lenders target vehicle buyers. If you’re lucky, you’ll get a rate below 10%, but beware, it could also be as high as 30%!

In real estate, alternative lenders have been gaining market shares in recent years, accounting for almost 20% of new loans last year. These companies offer short-term loans, from a few months to two or three years, and high interest rates. As these alternative lenders are not regulated by the Office of the Superintendent of Financial Institutions (OSFI) in the same way as banks, they do not have to stress-test their customers. 

An alternative loan can be interesting if you intend to repay it quickly, for example in the case of real estate flips or if you are expecting an inheritance soon. The reason is simple: Rates are two to four times higher than with a bank, plus there may be administrative fees.

Checklist: Make the Most of an Alternative Loan

To help you decide whether an alternative loan is right for you, we’ve put together a list of things to think about:

  • Do you qualify for a traditional loan? If so, a traditional loan will most likely cost you less in interest.
  • Can you use a credit card to pay your expenses? At what rate? We recommend that you compare the rate of your credit card, if you have one, with the rate of an alternative loan, so you can choose the least expensive option.
  • Will you be receiving money soon? An alternative loan must be repaid within a timeframe that is often short. Realistically assess your chances of getting that dream job, receiving a gift or inheritance from a loved one, or reselling a property at a profit by the end of the term.
  • Do you need to build your credit? A credit score takes time to build up. Taking on debt and paying it off is the only way to actively work to improve it.

An alternative loan may allow you to continue living well for a while, but the repayment time frame is short. Use this time to review your budget. Can you cut your expenses? We’re well aware that living your life without the Internet or a car isn’t always possible. But you need to look at all your expenses to see where you can cut back: Do you have too many subscriptions, for example? To get back on track for good, try to develop good habits right now.

Maude Gauthier is a journalist for Hardbacon. Since completing her Ph.D. in communications at University of Montreal, she has been writing about finance, insurance and credit cards for companies like Fonds FMOQ and Code F. As a responsible user of credit cards, she can spend hours reading the fine print to fully understand their benefits. Because of their simplicity, she developed a preference for cash back cards. After suffering steep increases with her former insurer, she can now proudly say that she saved hundreds of dollars by shopping around for her auto and home insurance. In her free time, she reads novels and enjoys streaming popular shows (and possibly less popular shows, like animal documentaries).