For many Canadians, the words “private lending” conjure up images of shadowy backroom deals or last-resort measures for those in financial ruin. If you’ve spent any time researching how to consolidate debt, buy a home with a bruised credit score, or fund a quick renovation, you’ve likely encountered a mountain of conflicting information.
The reality is that private lending has evolved into a sophisticated, highly regulated, and essential part of the Canadian financial landscape. It serves as a vital bridge for people who don’t fit into the increasingly narrow “boxes” defined by big banks.
To help you navigate your financial journey with clarity, let’s pull back the curtain and dismantle the most common myths, replacing them with the grounded realities of the modern private lending market.
Myth 1: Private Lending is Only for People with "Bad Credit"
The Reality: While private lenders are indeed more flexible with credit scores, “bad credit” is only one small piece of the puzzle.
Big banks are bound by rigid federal stress tests and “A-lender” guidelines. This means even someone with a high net worth or a six-figure income might be rejected if they are self-employed, have irregular seasonal income, or are new to the country.
Why it matters: Private lenders look at equity and overall potential rather than just a beacon score. If you have equity in your home or a solid down payment, a private loan is often used as a strategic tool to bridge a gap—perhaps to renovate a “fixer-upper” that a bank won’t touch, or to consolidate high-interest credit card debt to improve your credit score so you can return to a traditional bank later.
Myth 2: The Interest Rates are "Predatory"
The Reality: Private lending rates are higher than bank rates, but they aren’t “predatory”—they are risk-adjusted.
Think of a big bank like a massive cargo ship: it’s stable and cheap to run, but it’s slow and can only travel in deep, well-marked waters. A private lender is like a speedboat: it can go where the big ship can’t, it moves much faster, but it costs more in fuel to operate.
The Math: Private lenders take on files that traditional institutions deem too risky. To offset that risk, rates are higher (often ranging from 8% to 12%, depending on the equity). However, for a consumer paying 19.9% or 29.9% on credit cards, a private loan at 11% is actually a massive cost-saving measure. It’s about the “net gain”—if the loan saves you $500 a month in interest payments, the higher rate is a tool for progress, not a trap.
Myth 3: Private Lenders "Want" You to Default so They Can Take Your House
The Reality: This is perhaps the most persistent—and incorrect—myth of all. Private lenders hate foreclosures.
A foreclosure (or Power of Sale) is a legal nightmare for a lender. It involves expensive lawyers, months of lost interest, property maintenance costs, and the uncertainty of a public auction. It is a slow, draining process that eats into their profits.
The Partnership: A successful private lender wants a “win-win.” They want to provide you with a loan, collect the interest payments, and see you successfully exit the loan (usually by refinancing back to a bank or selling the property) at the end of the term. Their business model relies on a revolving door of successful clients, not a portfolio of seized houses.
Myth 4: It’s an Unregulated "Wild West"
The Reality: In Canada, mortgage brokerage and private lending are subject to strict provincial regulations (such as FSRA in Ontario).
Private lenders often work through licensed mortgage brokers who have a fiduciary duty to explain the terms of the loan clearly. Every contract must outline the interest rate, the fees, and the “exit strategy.”
The Reality Check: You aren’t signing a napkin in a coffee shop. You will work with your own independent lawyer who reviews the documents to ensure your interests are protected. The transparency in modern private lending is lightyears ahead of where it was twenty years ago.
Myth 5: Once You Go Private, You’re Stuck Forever
The Reality: A private loan is meant to be a short-term bridge, not a forever home.
Most private loans have terms of 6 to 12 months. The goal is almost always to use that year to solve a specific problem:
- Repairing Credit: Using the loan to pay off collections and late balances.
- Proving Income: Giving a self-employed person time to show a year of solid tax returns.
- Property Seasoning: Fixing up a property to increase its value.
The Exit Strategy: A reputable lender will ask you on day one: “How are you going to pay this back in 12 months?” If there isn’t a clear path back to a traditional bank or a sale, a responsible lender won’t even grant the loan.
The Hidden Benefits of Private Lending
Now that we’ve cleared the air on the myths, it’s worth looking at the “Realities” that make this an attractive option for thousands of Canadians:
- Speed: Banks can take 30 to 45 days to fund a loan. A private lender can often move from application to cash-in-hand in 5 to 10 business days. This is crucial for avoiding tax arrears or stopping a power of sale.
- Common Sense Underwriting: Private lenders listen to your story. If you lost your job due to an illness but are now back at work, a bank might still decline you based on last year’s T4. A private lender looks at your current stability.
- Interest-Only Options: Many private loans are “interest-only.” While this doesn’t reduce the principal, it keeps your monthly payments much lower, giving you “breathing room” to get your finances in order during a tough transition.
Is Private Lending Right for You?
Private lending isn’t a “one-size-fits-all” solution, but it is a powerful one when used correctly. It is a financial “reset button.”
It might be the right move if:
- You have at least 20-35% equity in your home.
- You have a high-interest debt load that is suffocating your monthly cash flow.
- You need money quickly for an emergency or a time-sensitive investment.
- You have a clear plan to improve your financial situation within 12 months.
It might NOT be the right move if:
- You have no way to pay the loan back at the end of the term.
- You are borrowing money to cover basic living expenses without a plan to increase your income.
Final Thought: The Power of the “Helping Hand”
At its core, private lending is about opportunity. It’s about looking past a computer-generated credit score and seeing a person who needs a second chance, a fresh start, or a bridge to their next big milestone.
By understanding the realities—and ignoring the myths—you can use private lending as a stepping stone to the financial future you deserve.