Alternative Lenders: 
Explained

Alternative lenders are a necessary part of Canada’s lending ecosystem.

Here are the facts:

Over 8 million Canadians have credit scores (below 720) that make them non-prime and sub-prime, meaning they would struggle to qualify for a loan from a traditional financial institution.1

CLA-certified alternative lenders are critical to these 8+ million Canadians who don’t qualify for a traditional financial institution loan, providing them with access to the credit they need.

Without access to installment loans offered by alternative lenders, everyday Canadians with non-prime credit scores have few options when it comes to accessing loans for essential expenses, having to rely on payday loans or worse.

Alternative lenders provide an opportunity for everyday Canadians to repair their credit score and eventually qualify for bank loans at lower interest rates, as they report loan payments to the credit bureau.

Alternative lenders are NOT payday lenders. Alternative lenders offer installment loans at lower rates to borrowers compared to payday lenders, and report the borrowers repayments to the credit bureau so Canadians can rebuild their credit score and graduate to lower rates.

1 Data based on TransUnion’s Credit Vision Risk Score (2021).

By the numbers

Over 8 million Canadians have credit scores that are not high enough (below 720) to qualify for a traditional financial institution loan and are therefore classified as non-prime and sub-prime consumers.
63% of non-prime Canadians are losing sleep over money issues.
45% of non-prime Canadians have been turned down for a loan over the past year.
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.
Non-prime Canadians borrow primarily to pay the bills (53%); for essential expenses (39%); home and auto repairs (28%) and to consolidate debt (24%).

What’s the difference between
Alternative and Payday Lenders?

Product

Payday

Payday lenders offer high-interest (over 400% APR) short-term loans with a single balloon payment structure, meaning borrowers have to repay the loan amount and interest at once within a short window.

Alternative

Alternative lenders offer installment loans at lower interest rates (up to 47% APR maximum) that the borrower gradually pays back over a longer period of time.

Regulation  

Payday

Payday lenders are exempt from the maximum allowable rate of interest in the Criminal Code through a loophole in section 347.1 that devolves regulation of the payday loan sector to the provinces.

Alternative

CLA-certified alternative lenders are credible financial institutions, governed and regulated by Section 347 of the Criminal Code of Canada, which outlines a federal interest rate cap of 60% on loans.

Lending Times

Payday

Payday lenders provide a short window to pay back loans (maximum of 62 days in 5 provinces).

Alternative

CLA alternative lenders allow the borrower to pay the loan back in predictable regular installments over a longer period of time, making it affordable and manageable for borrowers to repay the principle and interest on the loan.

Credit Rebuilding

Payday

Payday loans do not offer Canadians a chance to rebuild their credit score and move up to prime interest rates, leaving those who use payday loans stuck in a debt-cycle.

Alternative

CLA alternative lenders report customers’ payments to the credit bureau, giving borrowers the opportunity to improve their credit score and graduate to prime rates.

Financial Education

Payday

Payday lenders do not care about the financial wellbeing of their customers, and do not typically offer any financial literacy or improvement services.

Alternative

Many alternative lenders offer financial literacy platforms and services to assist customers in achieving their financial goals and graduating to lower rates.

The issue

Today, despite the existence of a mature lending market in Canada, many Canadians – over 8 million – do not qualify for loans at prime interest rates when they need it, because their credit scores indicate they are “higher-risk” for defaulting on loan repayments. Their only option is the regulated non-prime alternative lending market.

Lowering the maximum allowable rate of interest below an APR of 47% will mean these Canadians will be priced out of the lending market. Many of these everyday Canadians will not have access to credit and will not be able to obtain loans to cover essential expenses, such as paying for unexpected bills, auto repairs or consolidating debt.  It will not mean that borrowers will access the same loans at reduced interest rates: it simply means that lender will no longer be able to lend to a whole segment of customers.

Canadians with lower credit scores already have few options when they need credit. Eliminating access to credit would not eliminate the need of these millions of Canadians to access credit when unexpected expenses emerge, having to rely on payday lenders, pawn shops or even illegal lenders.

Without access to credit, the 8 million non-prime Canadians will struggle to rebuild their credit score and get back to borrowing at prime interest rates, as borrowing and repaying credit in a timely manner makes up the bulk (48%)[2] of an individual’s credit score.

The government needs to ensure Canadians can still access the crucial credit they need and that can help them rebuild their credit scores and graduate them to prime lending.

2 Source: TransUnion LLC. (2021)

Why it Matters

Everyday Canadians will be shut out of Canada’s lending market.

According to recent data, more than half (53%) of non-prime Canadians borrow money to pay the bills, and over a third (39%) for essential expenses. These individuals shouldn’t have to resort to payday lenders or other undesirable sources, but without alternative lenders, that is exactly what would happen.

They deserve a chance to rebuild their credit and achieve their financial goals. Lowering the maximum allowable rate of interest will prevent over 8 million Canadians from receiving that chance because alternative lenders will not be able to lend to higher risk borrowers.  Non-prime Canadians are a core part of Canada’s population. In a recent study by Pollara, it was found that 35% of non-prime borrowers are everyday, middle-class Canadians (earning $50,000-$100,000).

Want to learn more?
Visit the CLA website for more information, or contact us.

Payday lenders will not be affected by reducing the maximum allowable rate of interest cap. More effective solutions exist.

Payday lenders are not currently regulated by the Criminal Code. Lowering the maximum allowable rate of interest in the Criminal Code will not impact payday lenders. They charge an annual interest rate of over 400%. Instead of helping Canadians, lowering the maximum allowable rate of interest will prevent non-prime Canadians from accessing loans to cover essential expenses.3

Being priced out of the market will mean non-prime Canadians will have even fewer options when unexpected expenses emerge, having to rely on payday lenders, pawn shops or illegal lenders.

3 Essential expenses are defined as rent and groceries by the Pollara Insights survey of non-prime borrowers.

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“I was stuck in a constant cycle of debt because I didn’t have enough financial education. After being declined at the bank, I decided to get a loan with an alternative lender to consolidate my debt so I could finally pay it off and feel secure. They walked me through my credit history, explaining everything to me that could negatively impact my score, which has since improved quite a bit. I’m thankful and feeling optimistic about my financial future.”

B.P. - 29
LEGAL ASSISTANT
vancouver, bc

“My husband and I recently separated. This was the first time that I had to live off of a single income and I didn’t realize how quickly my bills would start piling up. I knew little about my credit score but an alternative lender gave me a detailed overview of my credit report and explained how to improve it. I was finally able to pay off my bills and my credit score has increased significantly. I now feel like I’m getting ahead with my future.”

t.b. - 48
Registered nurse
kenora, on