There will be interest payable if you decide to get a loan and will get added to your monthly payments.
Read further to understand everything you need to know about personal loans in Canada.
What is a Personal Loan?
Personal loans can get used for anything and gives you more options than other loans. A personal loan is a certain amount of money you borrow from a lender and repay within a specified time. Personal loans may either be unsecured or secured.
Once you get approved for a loan, you will receive the total amount from your lender, and you’ll begin paying the installments. These installments are fixed and paid monthly for a set term, at a fixed interest rate until the total amount gets paid in full.
Secured Personal Loans
- Requires collateral
- Cash savings or your car can get used as collateral
Unsecured Personal Loans
- Relies on your credit score
- Easy to qualify for a loan even if you have bad credit
- Banks will seize your assets if you default on your payments
What is a Term Loan?
A personal term loan has a repayment schedule agreed upon with either a floating or fixed interest rate. A floating interest rate is the interest amount you pay, which fluctuates monthly due to market changes.
- A long-term loan usually runs up to 30 years.
- Low monthly payments with more interest paid
- Gets paid back in under 12 months.
- High monthly payments with less interest paid
What are Personal Loans Used for?
A personal loan can get used for anything you want. One of the main reasons why most people get a personal loan is to consolidate their debt into one payment. By consolidating debt, you will avoid several interest charges.
Let’s look at a few reasons why you will need a personal loan:
- Home renovations and improvements
- Medical bills
- Car repairs
Where can You Get a Personal Loan?
There are various options on where you can get a personal loan in Canada.
Traditional lenders include banks or credit unions and are the best option in getting a personal loan. Banks are regulated, which makes them the safest option.
There are also modern banks that are online only and offer competitive rates on various products.
It’s vital to do your research when looking for a traditional lender, as there are so many available, and you will want to find the one with the best rates on offer.
It’s essential that you avoid alternative lenders as they have high-interest rates and often require collateral to secure the loan.
Examples of alternative lenders include the following:
- Title loan companies
- Payday lenders
- Private lenders
How do You Qualify for a Personal Loan?
You will need the following to qualify for a personal loan in Canada:
- Be 18 years old or older
- Be a Canadian resident
- Proof of your recurring income
- Have an open bank account
- Proof of your residence, for instance, a utility bill
- Proof of your expenses
Some lenders will deny you a personal loan if you’ve been through a recent divorce, are new to credit, been through collections, or paying back student loans.
Pay Close Attention to the Prime Rate
Canadian banks mostly base their interest rates on the Prime Rate, which follows the Bank of Canada’s interest rate. Interest rates are constantly fluctuating, so it’s vital to know the rates, especially if you have a variable rate.
Keep an eye on the news to get notified if they mention interest rate hikes. If this is the case, it will benefit you to get a personal loan with a fixed rate before the interest rate changes.
Know What Your Credit Score is
It’s vital to know your credit score, as the interest rate will depend on your score. A few things determine your credit score, such as the amount of credit you have and how consistent you pay your bills on time.
What to do if You Have Bad Credit
How Much Can You Qualify for?
You can get a personal loan for around $100 – $50,000. These loans often don’t require collateral, although some will want you to secure your loan.
Be cautious about securing your loan with large assets, as you could lose them if you don’t stick to your payments.
Do You Pay Tax on a Personal Loan?
Unless the original loan got forgiven, the Canada Revenue Agency (CRA) doesn’t consider loans as income, and no tax will be payable.
Before applying for a personal loan, consider if you really need it and ensure you can afford the monthly repayments. Your budget should account for all your monthly expenses, as well as an emergency fund and savings before you can truly afford a personal loan.
Keep an eye out for the Prime Rate and compare the rates and terms of various lenders to locate the best one 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 the most. Whether you need to pay for medical bills or go on vacation, a personal loan can help you in all situations.
Personal loans come with commitment and responsibility, so if possible, try to save for what you need and pay cash for it. Getting into debt unnecessarily can affect you financially, as well as your credit score.