Newcomer loans are defined as debt that is extended to people who have arrived into the country not too long ago as landed immigrants. While company policies may differ from lender to lender in terms of who qualifies for these newcomer loans, the general premise of these loans is to help customers with no credit score history secure some form of financing to manage a range of their day-to-day expenses. These customers, who may have limited savings of their own could see this as a form of bridge financing between now and when they gather up enough capital of their own to pay it off. However, there are certain considerations that need to be applied in these scenarios, which are discussed later in this article.
Who is a landed immigrant?
The term “landed immigrant” has been in use for a long time now. It is so deeply entrenched into the Canadian vocabulary that it can still be read in some of the older government publications and forms. That said, the term is actually an old classification for the language that is currently more prevalent in use – permanent resident. Permanent residency is a status provided to designate a person as someone who is not yet a Canadian citizen, but has the right to live and work in Canada without any limits on duration of stay. To apply to become a Canadian permanent resident, non-Canadians need to apply to the Immigration, Refugees and Citizenship Canada (IRCC) under one of several programs.
What is a SIN?
The Social Insurance Number (SIN) in Canada is a 9 digit number provided to enable people to work in Canada, as well as have access to government-provided programs and benefits. A SIN is unique to one person (and one person only) and is legally forbidden to be used by anyone else. While the SIN cannot be used as an identity document, employers are permitted to ask for it as part of employee recordkeeping purposes.
There are two types of SINs issued. The ones beginning with 9 are issued to temporary residents who are not Canadian citizens or permanent residents. These individuals may have employment authorization to work in Canada. SINs issued under this type have an expiry date and generally cannot be used when applying for consumer credit.
No-Credit Loan Description
With every conventional lending institution in Canada, credit checks are a non-negotiable prerequisite when applying for personal debt including car loans, personal loans, mortgages etc. This credit check is designed to protect both the consumer from taking on unmanageable loads of debt as well as the lending institution from the likelihood of potential default. To this end, the credit check looks at items such as the person’s income, current outstanding debts, payment history, payment patterns, past defaults etc. But while the credit check is an important part of the validation process for personal loans, landed immigrants (PRs) may not have established a deep enough credit history just yet to be able to yield these services from lending institutions. It is here that the no credit scoring loan for immigrants can be helpful.
Are these loans safe?
Not all loans for newcomers are created equal. While there are a lot of debt programs run by credible lenders, there are a handful of predatory lenders as well that borrowers need to be wary of prior to obtaining their loans. There are ways to cross-reference these lenders though and verify whether they truly have your best interests at heart:
- Check their rates: The interest rate is defined as the cost of borrowing money. When looking at a loan, it is important to look at both the interest rate as well as the Annual Percentage Rate (APR), which is the interest rate that a borrower pays over the course of a year. In some cases, there are lenders that will charge upwards of 60% APR which would mean that the borrower is paying a $60 in interest for every $100 of principal borrowed.
- Duration of loan: The duration of the loan (or loan term) is defined as the time between when the loan is obtained and when it is fully paid back including all principal, interest and fees. The longer the duration, the lower the periodic payments. Similarly, loans with short terms will have higher periodic payments, which would expose the borrower to higher cash outflows every period.
- Level of due diligence: Regardless of whether the company performs credit checks or not, the level of diligence they undertake in assessing the borrowers’ ability to repay is telling. Responsible lenders will ask for items including income, employment and banking history to be able to gauge the capacity for debt repayments during each period. Predatory lenders on the other hand, would not undertake this due diligence and provide loans with short terms and high interest that are designed to be difficult to repay. Once the borrower cannot repay these loans, the lender then “rolls them over” into a new loan and/or repossesses the collateral posted by the borrower.
Borrowing Best Practices
Prior to signing on the dotted line for a new loan for newcomers, asking and receiving satisfactory answers to a few questions regarding the lender and loan can save you a lot of pain later. Some of the baseline questions that should be asked are as follows:
- Is the lender asking for collateral? Secured loans require the borrower to put up collateral (such as a house or car). The asset put up as collateral then “secures” the lender in the event of default by the borrower. Because the lender has a course to making their money back in this case, there is less inherent risk on their side. This means that they are comfortable with providing lower rates for secured loans. That said though, while these secured loans may be cheaper on the face of it, a borrower can easily lose that asset if repayments are not made on time. While there is nothing wrong with obtaining a secured loan, weigh the costs and benefits very carefully before obtaining such loans.
- Was the lender considerate? As mentioned above, a socially responsible lender would make an effort to understand the borrower’s financial profile and evaluate their ability to repay based on banking histories and income. If the lender you are working with has not done so, tread carefully, and make sure you run your own calculations about the loan’s APR and subsequent periodic payments.
- Is the lender reputable? Often, a simple Google search can be a saviour. If you as a borrower feel you are being taken for a ride by a lender, the chances are that someone else has felt that too. Running a search on Google or checking their social media pages can allow you to see what others are saying about them. If it’s largely negative reviews, that’s not a great sign.
- What’s the rate being offered? Check the Annual Percentage Rate (APR) in these cases. The headline rate put on marketing materials does not tell the full story most of the time. When annualized, the final number can be vastly different. Ensure that you are aware of the actual rate you would pay over a year.
Advantages of No-Credit Check Loans
Especially for new immigrants, there are some advantages that can be gained from the no-credit check loan. Some of these include:
- Ease of access: The no-credit check loans allow even those with limited or no credit histories to obtain a loan. This can be helpful for permanent residents of Canada who may have a hard time obtaining loans from the large financial institutions.
- Multi-purpose: Once the loan is provided, it is up to the borrower to decide how they want to deploy the funds. This flexibility is in contrast to some personal loans provided by large financial institutions, which have to be deployed to a specific purpose. The uses for these type of loans can include tuition, housing, or other day-to-day expenses faced by families.
Disadvantages of No-Credit Check Loans
That said though, there are considerations to be made here. Some of the risks involved with obtaining newcomer loans are that they are:
- More expensive: Because of the higher risk that lenders take on when lending to people with zero or limited credit histories, these loans tend to be more expensive.
- Higher consequences: Some of these no-credit check loans require guarantors while others require security in the form of collateral. Defaults by the borrower can therefore leave their guarantors on the hook for the balance of the payment owed. In the cases of secured loans, the assets can be seized by the lender.
Frequently Asked Questions (FAQ)
1) Can anyone get a starter loan from Magical Credit?
No, at Magical Credit, only Permanent Resident (PR) holders are eligible for applying for and receiving a starter loan.
2) Do I need a Social Insurance Number to apply to a newcomers’ loan?
Yes, you would need a SIN to apply.
3) What type of loan terms and structures can I expect?
The individual loan extended is dependent on a variety of factors unique to each and every borrower. For more information, visit this page.
4) Do you run credit checks?
We always run credit reports. Even if it is a thin file, we start establishing there credit by doing this and reporting back to the credit bureau with positive payment history, We offer newcomers our STARTER loan - we give them $500.00 – report back to the bureau and start building there credit. Once paid in full they can qualify for an increase.
While the newcomer loan has some compelling benefits, there are also some downsides that need to be taken into consideration to ensure that you do not end up in a worse financial position than currently. The loans are designed to help people with otherwise limited access to financing by alleviating the burden of the credit history requirement. This is especially useful for people with Permanent Residency who may not have established an adequate credit history just yet. Most institutions require a minimum credit history to be able to gauge the borrower’s ability and capacity to manage debt. At the same time though, borrowers using these loans need to consider the implications that it could have on their financial profiles. By looking at the rate, the term and the lender’s overall credibility, borrowers are a lot less likely to suffer long-term consequences.