Personal Loans

A Guide to Personal Loans in Canada

What is a Personal Loan?

A personal loan is a loan taken out from any type of lender, for personal purposes. The vast majority of personal loans are unsecured and paid back on a month-to-month basis, like any other type of loan. Personal loans typically have lower interest rates than credit cards, and in the right circumstances, can be extremely beneficial for Canadian borrowers.

When to Choose a Personal Loan

Determining when to choose a personal loan isn't always easy. But as a general rule of thumb, if there is no defined loan type (ex. Auto Loan or Mortgage) for the funding you need, chances are a personal loan is the right choice for you. It's just a matter of finding the best personal loan, with the right interest rate and payback period for you. Despite the wider coverage of a personal loan, it is still important in your application process to be as specific as possible about your intended use of the loan. Selecting the right type of personal loan can further increase your chances of receiving the best rates and terms available to you.

Weighing Options and Interest Rates

Like any other loan, picking the right loan, with the right interest rates and payment options, is crucial to your financial well-being. When looking for a loan, be sure that the interest rate is fair based on your credit score. Many lenders may offer loans designed for individuals with bad credit, which might not apply to you. It is important to do your research and weigh as many options as possible.

For example, using a loan search engine like LoanConnect allows you to complete a single application and be presented with multiple offers available to you. There is no impact on your credit score, but it allows you to see what rates are available to you from multiple lenders in one place.

Unsecured Vs. Secured Personal Loans

In Canada, the vast majority of loans are unsecured personal loans. An unsecured loan is when the borrower takes the loan out without securing it against any form of personal asset. Unsecured loans usually have higher interest rates, but can be the best route if you have a reasonably healthy credit score. Secured loans are secured against personal assets such as your car or home, which act as collateral against the loan.

Advantages and Disadvantages of Personal Loans in Canada

Personal loans have a variety of advantages that can make them preferable to other types of lending solutions. In order to best gauge if a personal loan is right for you, consider the following:

• Personal loans typically have lower interest rates than a credit card and lines of credit
• Personal loans can be used for almost any type of lending need, including renovations, weddings, vehicle purchases, medical needs, and more
• Personal loans are offered by virtually every type of lender and can be quickly taken out with little to no hassle
• Personal loans offer an easy month-to-month payment schedule, usually over a term of 2 to 5 years

Though personal loans have a variety of advantages, it's always important to weigh the disadvantages as well:

• Personal loans usually have higher interest rates than other types of loans
• Personal loans with a reasonable interest rate usually require a healthy credit score, reducing the options available if you have bad credit
• Personal loans often have hefty administrative fees
• Personal loans are usually capped at $30,000, and if you require more, you might have difficulties securing the full amount.

What Can I Use a Personal Loan For?

Personal loans have a wide variety of applications, allowing you to use it for just about anything. Whether you are looking to consolidate your credit card debt, finance your education, or renovate your home, a personal loan can do the trick for almost any circumstance. Personal loans provide you with the flexibility you need to spend the money you receive from lenders, without restrictions.

How Do Personal Loans Differ From Other Types of Loans?

As mentioned before, personal loans do not have nearly as many restrictions as other types of loans on the market. The main differences typically come in the form of how the money is allowed to be spent, and how the money is disbursed. For example, a mortgage can only be used to pay for a house, student loans have to be used for school related costs, and car loans have to be spent on the purchase of a vehicle. Personal loans however, can be spent on virtually anything the borrower desires. Personal loans are also disbursed directly to the borrower, as opposed to a mortgage, for example, where the money is disbursed to the former homeowner in the transition of ownership.

Fixed Rates Vs. Variable Rates

Most personal loans are based on a fixed interest rate. However, there may be times when you have the option of choosing a variable interest rate. A fixed interest rate stays the same throughout the duration of your loan repayment while a variable interest rate fluctuates according to what the prime rate is at any given time. The prime rate is based on how much it costs the bank and other institutions to borrow money. If the rate goes up, you pay more in interest, if it goes down, you pay less. Both have their advantages and disadvantages.

A fixed interest rate can be lower or higher than a variable interest rate. It is ideal because you always know what you are paying, and do not risk the rate going up due to fluctuations in the prime interest rate. Its disadvantage is that you may be paying more when the prime rate falls. A variable interest rate is the better option when the prime rate is falling, but since the prime rate is influenced by many different factors, it can be difficult to time the rise and fall of the prime rate over a long time period. Most financial experts recommend variable rate loans be limited to durations of one year or less.

The Process and Disbursement of Funds

As mentioned above, personal loans are disbursed directly to the account of the individual who is seeking the loan. Compared to the other loan types, the disbursement of funds is relatively quick, and you can expect to get your money in 1 to 3 days. Like all other types of loans, you will be required to fill out a loan application where personal information is collected and verified. Pre-approval may help to expedite the process when appropriate. With LoanConnect, you can get pre-approved in as little as 60 seconds and help lenders quickly approve your loan application with the information you provide.

Personal Loans and Installments

If you have been browsing the internet to find out more about personal loans in Canada, you may have come across the term "installment", which can sometimes confuse potential borrowers. Installments are not to be confused with a traditional monthly payment. Installments are fixed amounts that have to be paid by the borrower on a periodic basis. For personal loans, this is normally monthly. However, be sure not to confuse this with a minimum monthly payment. Though the installment is the minimum amount you must pay, it is not a minimum payment. Many times you cannot pay more than the installment without penalties. Paying your installments guarantees you will have paid off the loan over the agreed upon term length, often without the ability to pay it off faster.

Personal Loans and Bad Credit

If you are looking for a personal loan, and have bad credit, your options may be very limited. The majority of banks and larger financial lenders design their loan programs and give preference to individuals with a good credit score. As the vast majority of personal loans are unsecured, lenders must protect their interests by loaning out to Canadians with strong credit. However, if you have bad credit, not all hope is lost.

Many private lenders in Canada are willing and ready to offer unsecured personal loans to individuals with bad credit. If you have bad credit, working with a private lender is probably your only option. You still must have a credit score above 550, and you should expect to pay a significantly higher interest rate. If you have bad credit, but ample cash flow to pay your installments, getting a personal loan from a private lender is a viable option. You can use LoanConnect to wade through your options from private lenders to find the right loan for you.

Approval Criteria For Personal Loans in Canada

Approval criteria for personal loans will vary by bank, lender and institution. However, there are some common criteria and guidelines. For larger lenders, you normally have to have a credit score above 650 and a healthy debt-to-income ratio. Your bankruptcy score must also indicate that you are not in any danger of going bankrupt and defaulting on your payments. In general, loans with the best interest rates are reserved for Canadians with credit scores of 740 and above. For private lenders, you will have to have a credit score of at least 550, but likely higher than 600, to receive a personal loan that is beneficial for you and your borrowing needs.

Do Personal Loans Show On Credit Reports?

Yes, personal loans, like most other types of debt will appear on your credit report. When you apply for any other form of debt, lenders will be able to see how much you still currently owe on your personal loan, whether or not you have been making payments and if you are still in good standing with the creditor.

Do Personal Loans Help or Hurt Your Credit?

Depending on the situation, a personal loan can both help or hurt your credit score. When you apply for a loan or take a loan out, it has the potential to lower your credit score in the immediate short-term due to the hard credit check lenders usually require. However, if it does lower your credit score, it is usually to a small extent and you should not be concerned by it. Making your installment payments and eventually paying off your loan will help your credit score long-term.

Do Personal Loans Require Collateral?

For the most part, no. Personal loans are normally, if not always, unsecured forms of debt, meaning that no collateral is required. When you take out a personal loan, you will typically not have to worry about creditors having a legal claim against your assets or home. However, if you default on the loan, lenders can take you to court and could possibly have your wages garnished until you have paid off the loan in its entirety.

Does a Personal Loan Help You Build Credit?

Yes. If you have bad credit, taking out a personal loan can potentially help you build your credit over time. Any form of debt where you make periodic payments on time and without incident, will help you build your credit over time. Be sure that the lender you choose reports your payments to the credit reporting agencies (Equifax and TransUnion in Canada), as not all private lenders will report your payment history.

If I Pass Away, Does my Personal Loan Debt Disappear?

No, personal loan debt does not disappear if you pass away. Lenders maintain the right to collect what is owed. Typically, this amount is easily taken care of by the assets left behind. If assets are not enough to pay off the remaining debt, the debt can pass onto children or other relatives.

Will a Personal Loan Affect my Mortgage Application?

To an extent, yes. Having personal loan debt technically will impact how mortgage lenders view your application. However, you should not let this discourage you. Any form of debt will be reflected in your debt-to-income ratio, which is a metric most mortgage lenders take into account. However, as most personal loans are below $10,000, the small amount of debt will have a fairly minimal, if any, impact on whether or not you are approved for a mortgage. Therefore, you should not be concerned about taking out a personal loan and its potential impact on a mortgage application.

Do Personal Loans Impact My Taxes?

No, personal loans should not impact your taxes at all. Personal loans are not viewed as any form of income. Paying interest on your loans is also not deductible, and therefore, is not part of any form of the tax return.

How Long Does a Personal Loan Take to Get?

It depends on how you are applying for the personal loan. If you are applying at a major bank, the approval process can take anywhere between 2 to 4 business days, with disbursement taking an additional 1 to 5 business days. If you apply for a personal loan online, it tends to be quicker. The approval process usually takes a few hours from the lender's side, and then the money can be disbursed to your account in as little as 24 hours from the time of your application date.

What Should I Do If I am Denied a Personal Loan?

If you are denied a personal loan, the first thing to do is to understand why you were denied. Were you denied because of poor credit, or was it because your income was not high enough? If it was because of poor credit, you may have to take steps to rebuild credit. You may want to consider a savings loan or debt management program which will help fix your credit in the long-term.

When I Apply for a Personal Loan do Lenders Check my Income?

In some cases, yes, lenders will require that you provide proof of income. However, more often than not, lenders can gauge your income level by checking your credit history to see if you have had any difficulties paying debts in the past. If you have a poor credit history or no credit history at all, lenders will probably ask you to provide them with proof of income before approving your loan application.