Personal Loans in Canada: Everything You Need to Know

At some point, you may need to take out a personal loan. Whether it’s for home renovations, urgent expenses, debt consolidation or other reasons, a personal loan can be used in many situations. There are numerous options for obtaining a loan, from traditional lenders to alternative lenders. Before making a decision, you need to consider a number of factors, including interest rates, payments and maturities. There are a lot of choices, so we’ve created this guide to help you understand personal loans and their key features.

What is a Personal Loan?

A personal loan allows you to borrow a sum of money from a lender, which you repay within a predetermined period of time. You can apply for a loan for a variety of reasons, such as home renovations, urgent repairs to your house or car, debt consolidation, etc. The features and conditions differ for secured and unsecured personal loans.

Secured Personal Loan

A secured personal loan is a loan that is secured by an asset such as a home. Borrowers typically use this type of loan for home renovations or major unexpected expenses. Since the loan is secured by an asset, it generally allows for a higher amount at a lower interest rate, compared to an unsecured personal loan.

Collateral: required (e.g. house, car, savings)
Loan amount: several thousand dollars (varies according to several criteria, including the market value of the collateral)
Interest rate: low (lower than an unsecured loan)
Loan term: several years

Unsecured Personal Loan

An unsecured personal loan is a loan that is not secured by an asset such as a house. This type of loan is protected only by a contract signed by the borrower. Borrowers often use this type of loan for debt consolidation or emergencies. Since the loan is not backed by an asset, the amount that can be borrowed is generally lower, and the interest rate is higher.

Collateral: not required
Eligibility: several factors, including your credit score (it is possible to obtain an unsecured personal loan despite a poor credit record, but check requirements and conditions)
Loan amount: a few hundred to a few thousand dollars
Interest rate: high (higher than a secured loan)
Loan term: variable (often varies from a few months to a few years)

Why Apply for a Personal Loan?

A personal loan can be used for a number of reasons, including:

Debt consolidation
Urgent repairs to your car or home
Education (check to see if you qualify for student loans or LLP from your RRSP)
Vacation
Home improvements and renovations
Car purchase (check if you qualify for a car loan)
Wedding
Medical bills
Funeral
Etc.

Ideally, don’t apply for a personal loan to buy consumer goods or experiences. Also, check your budget to make sure you have the financial capacity to make the payments and meet the deadlines of your personal loan.

How Much Can You Borrow?

The amount you can borrow with a personal loan varies according to a number of factors. Generally, it ranges from a few hundred to a few thousand dollars. For example, if you opt for an unsecured loan, you can borrow a relatively small amount.

Conversely, if you opt for a secured loan, you can borrow a much higher amount (and over a longer term). Why? This is because the collateral can be seized by the lender if you default on your payments or go bankrupt.

In short, make sure you have the financial capacity to take out this personal loan.

Where Can I Apply for a Personal Loan in Canada?

There are several loan options and personal financing products available from banks and alternative lenders.

Traditional Lenders

Traditional lenders include banks and credit unions. They are often the best option for obtaining a personal loan in terms of conditions and interest rates. However, eligibility criteria are often more restrictive than other personal financing options. If you need loan insurance, traditional lenders generally offer this option.

What’s more, there are online banks like Tangerine that offer competitive rates on personal loans and lines of credit. In short, the options are many, and you need to do your own research to find the personal loan that suits your financial situation and goals.

Alternative Lenders

There are also alternative lenders, ranging from loan providers like Fairstone Financial to title loan companies and payday lenders. Often, conditions are less attractive and interest rates are higher. But this isn’t always the case. If you need to obtain a personal loan from an alternative lender, check the repayment schedule, terms and conditions, among other things. Also, check whether you can repay your loan faster, without penalty.

Other Personal Financing Options

Other personal financing options exist, such as a personal line of credit or a credit card cash advance. Indeed, credit card promotional offers often allow you to borrow money in the form of a cash advance. The term is usually 6 to 12 months, and the interest rate is low or zero for the duration of the promotion.

Finally, you can take a look at low-rate credit card offers.

How to Qualify for a Personal Loan?

To obtain a personal loan, you need the following to qualify:

Canadian resident aged 18 or over
Proof of residency (e.g. utility bill)
Bank account in good standing
Proof of income
Proof of monthly expenses and payments, including debts

Even if you demonstrate all these elements, a lender may still refuse you a personal loan. For example, if your debt ratios are too high or if you’ve recently filed for bankruptcy.

What Is the Interest Rate on a Personal Loan?

The interest rate on a personal loan varies according to a number of factors, including the Bank of Canada’s prime rate, your current financial situation, your credit score and more. What’s more, some financial institutions are more inclined than others to offer advantageous interest rates, often with online banks. Finally, compare rates using an online comparator, and keep an eye out for promotional offers.

Other Considerations

Credit Score

As mentioned earlier, a good credit rating can have an impact on eligibility for a personal loan. But, also, to get a good interest rate. So it’s essential to know your credit score before applying for a loan. The elements that determine your credit score include your punctuality in repaying your loans, your credit utilization ration and your credit history. In short, check with the two credit bureaus: Equifax and TransUnion.

However, you should be aware that lenders can refuse you a personal loan for a number of reasons. For example, if you have bad credit. If this is the case, consult the guide below to improve your credit score. It contains several tips.

If you’re in debt, you could also take out a balance transfer credit card with a zero or reduced interest rate. Then transfer your outstanding balances to this new card, and stick to the due dates.

Personal Loan Calculator

Before applying for a personal loan from your bank, take a few moments to compare the interest rates and terms of personal loans available on the market. Visit the websites of various Canadian financial institutions. Then use a personal loan calculator to estimate payments based on loan type, term, etc.

Debt Spiral

If you are over-indebted, avoid applying for another loan. Your financial health could deteriorate rapidly and you could enter a debt spiral. If this is the case, consult the following guides for our best tips:

Obviously, if it’s an emergency, you have to act. But don’t hesitate to ask for help. For example, you can contact your local ACEF (Association coopérative d’économie familiale). These non-profit organizations offer a range of budgeting and financial education services. Alternatively, you can contact your financial institution to assess your options. Finally, you can contact a bankruptcy trustee to discuss options such as debt consolidation and a consumer proposal.

Bottom Line

In short, there are many types of personal loans and many types of lenders. If you need this loan, check your budget to make sure you have the financial capacity to make the payments and meet the deadlines. There are many reasons to apply for a personal loan. If possible, save the amount of money you need to pay your expenses without going into debt. However, if it’s an emergency and you don’t have emergency funds, a personal loan is one of the options available.

Frequently Asked Questions About Personal Loans in Canada

What is the current interest rate for a personal loan?

The interest rate on a personal loan varies according to a number of factors, including the Bank of Canada’s prime rate, your current financial situation, your credit score and more.

Which is the best bank for a personal loan?

There’s no such thing as the best bank for a personal loan. But, be aware that there are several types of lenders, such as traditional banks and alternative lenders. But, also, personal financing products. Each lender has its own eligibility criteria for personal loans.

Which bank is the easiest to get a loan from?

Each bank has its own eligibility criteria for personal loans. Some banks are more flexible than others. What’s more, if you pledge an asset as collateral, banks will generally be more flexible in granting you a personal loan.

How much can I borrow for a personal loan?

The amount you can borrow for a personal loan varies according to several factors. If you opt for an unsecured loan, you can borrow a relatively small amount. Conversely, if you opt for a secured loan, you can borrow a much higher amount.

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