Loans are a common financial solution Canadians use to solve their financial problems. The necessary amount of money can be taken from various financial institutions, including banks, credit unions, and online lenders. Depending on your needs, you can find multiple types of loans in Canada.
You can always divide all the borrowing options into secured and unsecured loans. While secured loans always require collateral, unsecured ones usually come with stricter requirements instead of asking borrowers to provide valuable assets. Various ways to borrow money have different requirements, repayment terms, and interest rates. Keep reading to learn more about the most common loan options in Canada.
How to Borrow Money in Canada?
Canadian residents can rely on various loan options, including both secured and unsecured loans and open and closed ones. The situation with borrowing money in Canada looks very similar to one in the U.S. Here are the types of loans in the USA, so you can see that even the borrowing options and interest rates are almost the same.
Whether you are in the U.S., Canada, or any other country, if you have a low credit score disabling you from many types of loans or just prefer saving money on interest, consider borrowing from secured loan lenders. If the risk of losing collateral is not for you, stay on an unsecured loan.
Loans in Canada can also be categorized as open and closed ones. A closed loan is typically borrowed to finance a specific purchase, such as a home or car. The line of credit you get with these loans is only enough to cover the cost of the desired vehicle or house. After the funds are repaid, you become an owner of the purchased thing.
Open-ended loans include credit cards and home equity lines of credit. These financing options allow you to continuously borrow money for any purpose.
The main ways to get extra cash in Canada include the following:
Personal Loans
A personal loan is money taken from a financial institution, such as a bank, credit union, or an online lender, to finance a large purchase. Personal loans are usually given in one lump sum and then repaid with a fixed or variable rate in a series of monthly payments for up to 60 months. The maximum amount for most personal loans is $50,000, which is enough for most significant purchases.
To get approved for a personal loan, you will usually need a good credit score. However, the credit score requirements depend on whether you apply for a secured or unsecured personal loan option.
Secured Personal Loans
A secured personal loan requires collateral from a borrower, which is usually a car or home. By providing valuable assets to a lender, applicants increase their chances of getting approved for a personal loan with better terms. As an alternative to personal loans pledged by collateral, borrowers also apply for other types of secured loans, including pawn loans and car title loans.
Unsecured Personal Loans
An unsecured loan allows you to get money without providing a lender with collateral. You will not lose your valuable asset if you fail to repay the loan. At the same time, getting an unsecured loan is generally more challenging due to the higher risks for a lender. It typically comes with higher interest rates and additional fees and requires a hard credit check to prove that a borrower is able to return the funds.
Mortgages
A mortgage loan, also known as a home loan or a mortgage, is one of the most popular types of loans in Canada. It is a secured and closed loan, which means it can be used only for property purchases, and the real estate you buy can be repossessed by a mortgage lender if you miss your monthly payments.
Mortgage loans are usually given for a period of 25-30 years and require a good credit score from a borrower. Furthermore, you will need to make a down payment of at least 20% to get funding. When applying for a home loan, make sure to compare mortgage rates from different financial institutions to choose the best offer with the most favorable terms.
Student Loans
Financing higher education in Canada is a huge stress for students and their families, especially when it comes to medical or law studies. Therefore, taking out a student loan is a common thing in the country. While there are various aid options from the federal or provincial government, Canadians also use loans from banks, credit unions, and online lenders.
The best thing for many students is that they don’t need to worry about returning the debt immediately after getting the money. As a rule, they have enough time to prepare for the repayment process, as it generally starts after a student’s graduation.
Auto Loans
A car loan is a popular option for auto purchasing. Getting financial assistance to buy a vehicle is available through credit unions, banks, online providers, or dealerships. Auto loans are a type of secured loan where the car you purchase serves as collateral. So, if you fail to pay off the debt, you will lose both your vehicle and money.
Car Title Loans
A title loan, or car title loan, is a secured loan when you receive extra funds pledging your auto as collateral. This borrowing option is available only for auto owners. A title loan is a short-term loan with a repayment period of up to 30 days. Short loan terms and high interest rates reaching 300% APR make this type of loan a risky option, so many financial experts recommend avoiding it.
Business Loans
A business loan is given by financial institutions to companies or entrepreneurs for launching or making improvements in their businesses. The expenses usually covered by business loans include buying new supplies, expanding operations, upgrading technology, etc.
Payday Loans
A payday loan is another common way for Canadians to get extra cash. This borrowing option allows individuals to get fast access to money (primarily within one business day) with no hard credit check.
Most payday lenders don’t have minimum credit score requirements and approve even bad or poor credit borrowers. However, people usually need to pay for the benefits they get. Thus, these small loans typically come with high interest rates, which may reach 500% APR (annual percentage rate).
Credit Cards
The best-known way to borrow money is to withdraw the necessary amount from your credit card. Although credit cards have high-interest rates of around 20%, they are still a convenient financing option, allowing you to avoid hard credit checks.
Personal Line of Credit
While personal lines of credit work similarly to personal loans, there are still certain differences. While with a personal loan, you borrow the approved amount and pay interest rates for it, a personal line of credit allows you to get less funds than you are approved for. Then, you pay an interest rate only for the amount you use. Like a personal loan, you need to make a minimum payment monthly toward the balance.
How Do Personal Loans Work in Canada?
Personal loans are taken out in one lump sum by a borrower and then repaid in small monthly payments, also called installments. The repayment amount includes the principal and interest rate, which can vary depending on different factors, such as your credit score and creditworthiness and the specific lender’s offer.
Interest rates for personal loans can be either stable or variable. When an interest rate is stable, you know the exact sum you need to pay for your debt repayment monthly. When it varies, you may face difficulties due to the unpredictable amount of loan payment.
How to Apply for a Personal Loan in Canada?
Taking out a personal loan in Canada is not as difficult as it may seem initially. Take out the following steps and get the necessary amount in your picket within one business day:
Step 1. Access your financial situation
One of the main factors for lenders is your credit history and income. So, check your credit report and analyze your current financial situation. This will help you to make informed financial decisions during the loan process.
Step 2. Shop around
While there are many lenders offering personal loans, it may be challenging to find those with reasonable loan terms. Pay attention to the providers’ personal loan interest rates, minimum credit score requirements, and repayment terms to choose the best offer.
Step 3. Apply for a Loan
After choosing a financial institution with the best terms and conditions, submit your personal loan request and provide the required documentation.
Step 4. Get approved
If you meet the lender’s minimum credit history and other requirements, they will send you an approval decision as soon as possible.
Step 5. Sign a loan agreement
If you agree with the terms a credit union, bank, or online lender offers to you, sign a loan contract. Make sure to read it carefully to avoid any unpleasant surprises.
Step 6. Get funded
After signing a loan agreement, expect the money in your bank account as soon as the next business day.
The Bottom Line
Canadians can enjoy a large number of available borrowing options, from payday loans to mortgages. The wide selection of types of loans allows everyone to find the best solution for their needs. However, it is crucial to be a responsible borrower and always pay off the debt on time to build a good credit history and avoid extra charges.
FAQ
What are personal loan requirements in Canada?
Although all personal loan lenders have different eligibility criteria for their borrowers, you will usually need to have proof of stable income, a bank account, and a permanent address. Furthermore, most lenders will pay attention to your credit report, so you may need to meet their minimum credit score requirement.
What is the average personal loan interest rate in Canada?
According to Statistics Canada, the average interest rate for a personal loan in Canada is 10.04%, while the maximum amount financial institutions are allowed to charge is 47% APR. Remember that your interest rate can be impacted by factors like your credit history, the type of lender, and the type of loan.
What are the main reasons for taking out a personal loan in Canada?
Most Canadians use personal loans for debt consolidation, medical bills, large purchases, home improvements, vacation or wedding financing, and covering emergency expenses. There are no restrictions regarding the usage of personal loans, so you can use them however you want.
Can I get a personal loan with bad credit?
Yes, you can. Although getting approved for a personal loan with bad credit is often difficult, it is still possible. For example, you can apply with a cosigner, pledge collateral, borrow a lower amount, or look for bad credit personal loans.