As private lending in Canada grows, it’s important for prospective borrowers to understand the industry. What is private lending and how expensive are private loans when compared to banks? Where is the best place to find private lenders in Canada? Is private lending even legal? This article addresses some of the most common questions that people have about Canadian private lenders.
What is a private lender in Canada?
A private lender in Canada is a company, person or even a group of investors who lend out money in return for interest and fees. In most cases, they secure their loans by taking a mortgage on real estate. If the borrower defaults on their loan obligations, the private mortgage lender can use the legal system to foreclose on and take possession of the property that was used as collateral.
Note: No Credit Check Loans is a Canadian private lender, but we don’t ask for a mortgage. Our loans are generally unsecured.
Private lenders in Canada are not banks. Banks are deposit-taking institutions (meaning that you can open a chequing/savings account), who also deal in insurance, investments, loans and other financial services. Private lenders generally only issue loans, although some offer insurance products that are connected to those loans.
What do Canadian private lenders do for the economy?
Canada’s banking system is heralded internationally as one of the safest in the world, as evidenced by its resilience to the 2008 Great Recession. One reason it’s so secure is because Canadian banks generally don’t lend to subprime borrowers. As such, people with poor credit, no credit and irregular incomes are frequently unable to get mortgages, credit cards and lines of credit from banks.
Private lenders can help fill the void by offering financing solutions to borrowers who can’t qualify for a traditional loan. They can enable homeownership, automobile purchases and investment.
How much do private lenders in Canada charge?
There can be substantial differences in the interest rates that Canadian private lenders charge. Rates can range from 5% to 45% per year.
Further, there can be fees such as:
- broker fees
- origination fees
- legal fees
- application fees
- administration fees
If it’s a private mortgage loan, then the lender will typically require the borrower to reimburse it for its legal fees, too.
All of these expenses should be factored into the total cost of credit before making a borrowing decision.
What is “cost of credit”?
As discussed, a loan can be comprised of interest, fees and reimbursements. For instance, a $40,000 loan might have an 18% interest rate, a 2% origination fee and $3,000 of legal fees that need to be reimbursed by the borrower.
The cost of credit is the total amount a borrower pays to a lender. It factors in all of expenses associated with borrowing money, including interest, fees and reimbursements. The cost of credit is an important concept to understand because many private lenders in Canada charge a combination of interest and fees.
What is a direct private lender?
A direct private lender provides loans directly to borrowers, rather than using loan brokers and other agents. Borrowers can save money on fees and commission by using a direct private lender in Canada.
Do private lenders in Canada check credit?
It depends on the lender. Each private lender in Canada will have its own due diligence procedures. Some don’t focus on credit; rather they might look at the equity in your real estate or your ability to afford loan payments.
Regardless of whether the lender checks your credit, if you’re looking for a loan from a private mortgage lender in Canada you should be prepared to bear the expense of a property appraisal. This is a document prepared by an independent licensed appraiser stating the appraiser’s opinion of the property value.
Is a private lender better than a bank?
It depends on the circumstances. Bank loans are generally the least expensive credit products and are often excellent borrowing solutions. However, banks in Canada follow strict lending rules and have little room for flexibility. As a result, a lot of people cannot qualify for traditional financing if they have bad or no credit.
A private lender, on the other hand, can be more open with its financing options. Private lenders in Canada often work with people with bad credit or no credit history, knowing that there are other ways to assess a person’s ability to repay a debt.
Do private lenders do personal loans?
People often believe that private lenders only provide real estate loans, especially for fix-and-flip deals. This is a misconception. In fact, many private lenders (like us) give personal loans, too.
What happens if you don’t repay a private loan?
The greatest risk of private lending in Canada is a borrower failing to repay a debt. Private lenders are able to enforce their loans through two main avenues: taking legal action and/or hiring collections agencies.
Mortgage lenders generally opt to foreclose on a property through the court system. If the process is successful, they can usually recoup their funds within six to eight months under normal market conditions. If there is a balance owed after the real estate is sold, private mortgage lenders in Canada are still able to pursue the debtor for the rest of the money.
Unsecured loans can be harder to collect because they are not backed by an underlying asset. But private lenders are still able to use the legal system to garnish wages and place liens on the borrower’s assets.
Failing to repay a private loan will usually result in the following:
- contact from collections professionals
- contact from lawyers
- lawsuits and court judgements
All of this can lead to:
- a significantly reduced credit score
- loss of income and assets until the loan is repaid
- major hassles
Do private lenders need to hire collections agencies?
Collections agencies work for companies (and sometimes people) to whom money is owed. They are frequently hired by lenders across Canada, including both banks and private lenders, to help recoup funds from delinquent borrowers. By the time an account has been assigned to a third-party collector, it is likely that the borrower’s credit score will have dropped considerably.
However, the use of collections agencies is not required. Lenders can instead choose to take direct legal action.
Is private lending legal?
Yes, private lending is legal in Canada. However, private lenders must comply with provincial and federal regulations. For example, while the Canadian usury rate is 60% per year, in Alberta private lenders are required to secure a high cost credit license if they wish to lend at 32% interest or more.
Is private lending in Canada regulated?
Private lending in Canada is not regulated by a designated federal government agency (unlike the Office of the Superintendent of Financial Institutions, for example, which regulates banks). Instead, various provinces have their own sets of governing rules and regulations that concern mortgage loans and/or lending in general. Moreover, there are consumer protection laws that must be complied with.
Can a private person lend money with interest?
In Canada, yes. You are able to lend money and charge interest and fees, provided that you comply with applicable legislation. In fact, private lending is a common alternative investment that is frequently arranged by mortgage brokers and loan syndicators.
Keep in mind that you’ll need to pay tax on your private lending earnings, which are generally taxed as interest income in Canada.
Are private money lenders safe?
Loans from private lenders in Canada generally have interest rates and fees that are substantially higher than what a bank may charge. All of this information is in the loan agreement, which is vital to read and comprehend ahead of time. Borrowers should refrain from taking a private loan without being aware of the associated terms and conditions.
In particular, they should know:
- what the interest rate is
- how much in fees they will pay
- how much the monthly loan payments are
- when the loan is due
We pride our selves on giving our customers clear disclosures and easy-to-understand contracts. We also give them time to seek independent legal and financial advice before signing with us.
What’s the difference between a private lending and payday lending?
Payday lending is technically a form of private lending in Canada. However, payday loans are widely regulated because of how expensive they can be. In fact, the cost of credit for a payday loan can equal 500-600%.
The payday industry in Canada generally caters to lower-income segments of the population. Critics accuse it of keeping economically disadvantaged people in a cycle of high-interest debt. Advocates argue, though, that payday lenders provide an in-demand service. They also posit that regulating high-interest lending keeps it within the purview of the government and away from the criminal underworld.
The main differentiator between payday lending and private lending is the term. That is, how long the borrower has to repay the loan. Payday loans have ultra-short terms (they are supposed to be repaid by the borrower’s next payday). Conversely, private loans usually have terms of as low as three months.
As well, payday loans are usually just a few hundred dollars. There is no limit to how much credit a private lender might extend.
Do people who borrow from private lenders have bad credit?
Not always. Real estate investors, for example, often use a combination of bank loans and private financing for their deals.
Other times, borrowers with limited credit histories (such as newcomers to Canada and young adults) may use private lenders.
Can borrowing from a private lender increase a person’s credit score?
Yes, if the lender reports its loan portfolio to credit bureaus. However, this also assumes that the borrower makes their payments on time. If the borrower does not, then their credit score may suffer.
Where can I find private money lenders?
Private lenders are plentiful across Canada. A simple Google search for “Vancouver private lender,” for example, can generate results. Otherwise, a trusted mortgage broker can be a good source of referrals.
If you are looking for a private lender in BC or Alberta, consider No Credit Check Loans. We offer up to $50,000 of unsecured financing to residents across Vancouver, Kelowna, Calgary, Edmonton, Red Deer and other towns, municipalities and cities across the two provinces. We work with customers of all backgrounds, including people with bad credit and those with no credit whatsoever.
As our name suggests, we don’t run credit checks. Rather we use our own internal method of assessing a person or company’s ability to repay a debt. We offer flexible payment plans (monthly payments of interest only) and terms of up to one year.
Private lending in Canada: Conclusion
Private lending in Canada continues to expand as banks shy away from higher-risk loans. As a result, the opportunities are plentiful for borrowers and lenders, alike.