Most people will need a personal loan at least once in their lives. Whether you want to consolidate your debts, renovate your home or buy a new car, you can use a personal loan for anything.
If you decide to get a loan, you will have to pay interest on top of your monthly payments.
Read on to understand everything you need to know about personal loans in Canada.
What is a personal loan?
Personal loans can be used for anything and give you more options than other loans. A personal loan is a certain amount of money that you borrow from a lender and pay back within a certain period of time. Personal loans can be either unsecured or secured.
Once the loan is approved, you will receive the full amount from your lender, and you will begin making payments. These payments are fixed and paid monthly for a fixed period of time at a fixed interest rate until the full amount is paid.
Secured personal loans
- Requires a guarantee
- Cash savings or your car can be used as collateral.
Unsecured personal loans
- Depends on your credit score
- It’s easy to get a loan even if you have bad credit.
- Banks will seize your assets if you don’t pay your bills.
What is a term loan?
A personal term loan has a repayment schedule and a fixed or variable interest rate. A floating interest rate is the amount of interest you pay that fluctuates each month due to market changes.
Long-term loans
- A long-term loan usually lasts up to 30 years.
- Low monthly payments with higher interest payments
Short-term loans
- It is repaid in less than 12 months.
- High monthly payments with less interest paid
What are personal loans for?
A personal loan can be used for anything you want. One of the main reasons most people get a personal loan is to consolidate their debts into one payment. By consolidating your debts, you will avoid many interest charges.
Let’s look at a few reasons why you might need a personal loan:
- Vacations
- Renovations and home improvements
- Weddings
- Medical bills
- Funeral
- Car repairs
Where can you get a personal loan?
There are several ways to obtain a personal loan in Canada.
Traditional lenders
Traditional lenders include banks or credit unions and are the best option for obtaining a personal loan. Banks are regulated, making them the safest option.
There are also modern banks that are online only and offer competitive rates on various products.
It’s essential to do your research when looking for a traditional lender, as there are many to choose from and you’ll want to find the one that offers the best rates.
Alternative lenders
It is essential that you avoid alternative lenders, as they charge high interest rates and often require collateral for the loan.
Here are some examples of alternative lenders:
- Securities lending companies
- Payday lenders
- Pawnshops
- Private lenders
How to qualify for a personal loan?
You will need the following to obtain a personal loan in Canada:
- Be 18 years of age or older
- Be a Canadian resident
- Proof of your recurring revenue
- Have an open bank account
- Proof of residency, such as a utility bill.
- Proof of your expenses
Some lenders will deny you a personal loan if you have been through a recent divorce, are new to credit, have been in collections or are paying off student loans.
Pay particular attention to the prime rate
Canadian banks generally base their interest rates on the prime rate, which tracks the Bank of Canada’s interest rate. Interest rates fluctuate constantly, so it’s essential to be aware of them, especially if you have a variable rate.
Keep an eye on the news to be alerted if it mentions interest rate hikes. If this is the case, it’s in your best interest to get a fixed rate personal loan before the interest rate changes.
Know your credit score
It is essential to know your credit score because the interest rate will depend on your score. A few things determine your credit score, such as how much credit you have and how regularly you pay your bills on time.
What to do if you have bad credit
Traditional lenders may not give you a personal loan if you have bad credit. If you are considering a personal loan from an alternative lender, be wary of the interest rate offered.
How much can you claim?
You can get a personal loan for an amount between $100 and $50,000. Often these loans do not require collateral, although some require you to guarantee your loan.
Be careful when securing your loan with significant assets, as you could lose them if you don’t keep up with your payments.
Do I have to pay taxes on a personal loan?
Unless the original loan has been forgiven, theCanada Revenue Agency (CRA ) does not consider the loans to be income and no tax is payable.
Conclusion
Before applying for a personal loan, ask yourself if you really need one and make sure you can afford the monthly payments. Your budget must take into account all your monthly expenses, as well as an emergency fund and savings before you can really afford a personal loan.
Watch for the prime rate and compare rates and terms from different lenders to find the one that’s best for you. Avoid alternative lenders, as they will require you to secure the loan with collateral and charge higher interest rates.
A personal loan can help you when you need it most. Whether you need to pay medical bills or go on vacation, a personal loan can help you in any situation.
Personal loans come with commitment and responsibility. Whenever possible, try to save up for what you need and pay cash. Taking on unnecessary debt can have an impact on your financial situation and your credit rating.
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