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Before granting you a credit, the financial institution must assess your creditworthiness, ask you a few questions and request supporting documents. Essentially, an update on the audits conducted by the bank is required.
Not All Credits Are Available to Everyone
The bank must ensure that the conditions for obtaining the loan are met by the borrower. Certain categories of loans, for example, are reserved for persons whose income does not exceed a certain amount (in particular loans for social integration).
The Bank Must Assess Your Solvency
Your financial situation must be consistent with the amount borrowed. As soon as you borrow, you agree to repay this credit, in several monthly installments, over a fixed period at the time of subscription. The bank must therefore ensure that you are financially able to meet these repayments.
The credit institution must check your solvency and ability to repay, taking into account your debt ratio. It is customary for monthly payments not to exceed one third of income.
The case law makes it clear that the bank has a duty to warn the uninformed borrower in writing about the risks associated with a credit transaction, taking into account its financial capacity and the resulting debt.
The lender must provide you with a written statement of your income, debts, and payments for any loans you have already taken out or are in the process of repaying, if you take out a consumer loan from a store or remotely. This form must be given to you and you must sign it declaring the accuracy of the information provided. For credits over a certain amount, you must also provide proof of identity, address and income.
Read Also: The Ultimate Guide to Private Student Loans
The first step is to calculate your disposable income: salaries, retirement, rental pension, dividends from your company, compensatory benefit, unemployment benefits, allowances, etc.
You can thus fulfill the conditions of acceptance, even if you are self-employed or looking for a job. Generally, the credit agency asks for more credentials to verify that your repayment capabilities will be stable over the long term.
Your Personal Expenses
Secondly, your expenses are deducted from your disposable income in order to obtain your monthly repayment capacities. Your capacity must be sufficient to cover the monthly payments of your personal loan while allowing you to cope with the expenses and unforeseen occurrences of daily life.
For “charges”, it is thus taken into account your rent or monthly payments of your real estate credit, your energy charges, taxes and maintenance, etc. To calculate them, your personal situation is also taken into account: family status, number of children, ownership or tenant status, etc.
Once these data have been reconciled, the credit institutions will know exactly what your repayment capabilities are, and will be able to assess whether or not your application meets their conditions of acceptance.
Read Also: 5 Common Private Student Loan Requirements
Starting a Business With a Bad Credit Rating: 3 Tips To Find Financing Despite Everything
Do you have a business plan but a poor credit score? Getting financing will be more difficult, but not impossible. Here are three tips for financing your business despite these challenges.
For many entrepreneurs, their company’s finances are often intertwined with their personal finances. For someone with a poor credit rating, this scenario can make it more difficult to access a business loan, than it would otherwise be.
The situation is much more common than we think. Valérie Bornais, Director of the Centre de l’entrepreneurship de Québec at the BDC, meets regularly with entrepreneurs whose credit history is tainted. “Many people don’t realize that their consumption habits can affect their credit score,” she says.
They also don’t realize that it can hurt their business plans. It is important to know that financing is often granted on the basis of a personal credit file.
This does not mean you should stop starting your business if your credit rating is bad. It all depends on what hurt your financial situation. If this is the result of an unfortunate event, a divorce, for example, but the business plan is solid, we will be more open to taking the risk and helping you, says Bornais. But you have to show that you have a good business plan, a good product, and you’re a good manager.
A few solutions are available to allow you to move forward with your business project without too many delays.
Read Also: How to Get Lender-Approved for a Private Loan With Bad Credit
1. Restore Your Financial Situation
There are different strategies to improve your financial situation. First, it is important to get your credit report from Equifax or TransUnion, the two main credit reporting agencies in Canada. This will help you know your score and ensure that the information on file is accurate. If this is not the case, it is possible to have them corrected by contacting these agencies.
2. Know How to Surround Yourself
Valérie Bornais, Manager at BDC’s Entrepreneurship Centre in Quebec City, says you can help your cause by finding a partner or partners with impeccable credit records. A more financially sound and qualified leadership team can tip the balance.
It is important to consult a lawyer when multiple people are working together on a project, in order to create an agreement that outlines everyone’s roles and responsibilities. This agreement can help protect all parties involved by outlining the rules of participation from the start.
3. Find a Guarantor
A relative or friend can act as a guarantor to facilitate a loan, who must meet the lender’s eligibility criteria.
The lender’s decision will be based on the guarantor’s personal equity and credit history. The parent or friend must also clearly understand the scope of their commitment since being a co-signer of the loan will appear on their credit file, which could limit their borrowing authority. The extent of the responsibilities must be understood, in the unfortunate case that you fail in your repayment duties.
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