When it comes to financing options in Canada, unsecured loans are arguably the most popular. And for good reason. Unsecured loans require no collateral, which means you aren’t risking a valuable asset. On the other hand credit score requirements and other eligibility criteria can be more strict.
Whether you need to consolidate consumer debt or pay for an unexpected expense. An unsecured personal loan is a versatile option.
What Is An Unsecured Loan?
An unsecured loan is a type of financing where no collateral is required to obtain the funds. Collateral, also known as security, is anything of significant value that can be used by the lender to cover the owed amount in the event that the borrower defaults. Because the lender is taking on more risk by not taking any collateral, the borrower tends to pay higher interest and be approved for a lower principal amount.
Unsecured loans can be obtained by both individuals and corporations. Once the borrower is approved for unsecured financing, they will obtain a lump sum amount upfront. After the funds are received, the borrower must make regular, scheduled payments, plus interest, to repay the borrowed amount.
What Can You Use An Unsecured Loan For?
Unsecured financing is a popular financing option for Canadians because it can be used for a wide variety of purposes. Businesses can use unsecured financing for inventory purchases, renovations and expansions. Individuals can use unsecured financing to pay unexpected expenses, make home improvements, or consolidate debt. Keep in mind that these are simply common uses for unsecured financing, the options are virtually endless!
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Forms Of Unsecured Loans
Unsecured loans come in different shapes and sizes. Each form has a unique feature, purpose and functionality. The three main forms of unsecured loans are listed below.
Debt Consolidation Loan
This type of loan allows individuals to consolidate various debts into one single loan. For example, if you have multiple credit cards with high interest and overdue utility bills, you can combine them using a consolidation loan. The loan is used to pay off the outstanding debts, then the borrower is responsible for repaying the consolidation loan. The advantage to the borrower is the interest rate on a consolidation loan is typically lower than other debts and they only have to worry about one monthly payment.
Revolving Loan
A revolving loan is a flexible form of financing that allows the borrower to access money up to a specified limit. The borrower only pays interest on the amount used and can make payments to regain access to their full limit. A line of credit is the most common example of this type of financing.
Term Loan
A term loan is the most traditional form of unsecured financing. The lump sum of the loan is provided to the borrower upfront, then the borrower is responsible for making regular, scheduled payments, plus interest, to repay the debt. This is a popular financing structure for secured loans as well.
Types Of Unsecured Loans
Unsecured financing has become more common in the modern world of financing. There are several types that have become prominent, let’s explore these below.
- Payday Loan. A short-term, unsecured loan that is small in amount and has high interest.
- Personal Loan. A basic, unsecured loan that can be used for virtually any purpose.
- Credit Card. A type of revolving credit whereby the cardholder can use the debt as needed and interest is only charged when the debt isn’t paid on time.
- Line of Credit. A type of revolving credit that allows the borrower to withdraw cash as needed. Interest is charged until the balance is completely paid off.
Where Can I Get An Unsecured Loan?
An unsecured loan can be obtained from almost any type of lender in Canada, from banks and credit unions to direct online lenders. Depending on what type of borrower you are and the types of features you’re looking for, you should have no trouble finding multiple loan options to meet your needs.
Can I Get An Unsecured Loan With Bad Credit?
It is possible to obtain an unsecured loan with bad credit, however, it can be challenging. Lenders are relying on creditworthiness entirely in their approval processes. It will be difficult for them to justify lending to you if they don’t like what they see in your credit report.
As mentioned, it is possible, just challenging. The goal is to find a lender who is willing to work with your circumstances. This can take some time, so be patient in your search. There are lenders who specialize in bad credit unsecured financing, that’s a good place to start.
Finally, expect that lenders who are able to work with your situation will likely charge higher interest. This is to account for the additional risk they are taking on. Remember that the high interest can be temporary if you refinance the loan in a year and manage the debt responsibly.
If you’re unable to qualify for an unsecured loan, you can resort to a secured loan. If you put up collateral, you’re more likely to get approved and you’ll likely get a lower interest rate.
Pros And Cons Of An Unsecured Loan
As with all financial products, it’s important to consider the pros and cons before making a final decision to proceed. Let’s explore the pros and cons below.
Pros
- Funding Possible Without Valuable Assets. Many people do not have assets with significant value which can make it challenging to find secured financing. Unsecured financing is a good alternative for these individuals.
- Easy Application Process. Your application can be completed online and is much simpler than traditional lending institution application processes. You will also find out if you were approved or not in under a day.
- Personal Assets Are Safe. In the event that the borrower cannot repay the loan on time, they will not need to give up personal assets. The lack of collateral requirements is what allows the borrower’s assets to remain safe.
Cons
- Small Loan Amounts. Compared to secured financing, lenders tend to lend smaller amounts. This is to decrease the risk of the borrower defaulting.
- Trouble With The Lender And The Law. If you default on payment, the lender could still come after you. The lender can attempt to sue you in court. If the lender is successful, they can place a lien on our personal assets to secure payment or garnish your wages.
- Higher Interest. Lenders charge more interest on unsecured financing to account for the additional risk. This means your monthly payments and the overall cost of borrowing will be higher.
- Difficult To Qualify. The main requirement for unsecured financing is good credit. If you don’t have exceptional credit, good payment history or enough payment history, you might not qualify.
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How To Qualify For An Unsecured Loan
While it is challenging to qualify for an unsecured loan, if you know what is expected of you, it can be easier to prepare. Creditworthiness is the main thing lenders consider, however, there are other considerations too. Below are common items that lenders consider for unsecured financing approval.
- Credit Score. To qualify for an unsecured loan, a credit score of 650 or higher is often required. If your credit score is below 650, do your best to boost it before you apply to better your odds of approval.
- Source Of Income. Credit is important, but lenders will also want to know that you have cash flow available to make payments. Often, this means regular and steady income.
- Payment History. Lenders will definitely consider your previous payment history. How an individual has managed debt in the past is one of the best ways to determine how they will handle debt in the future.
- Co-Signer. Using a co-signer is not the regular process used by unsecured financing lenders, but it can help to have someone back the loan. A co-signer agrees to repay the debt if the primary borrower defaults, this can make the lender feel more comfortable about extending debt.
In addition to the above, you will also need to be the age of majority in your province or territory. When you apply, you’ll need to provide government-issued identification and documents showing your proof of income.
Is An Unsecured Loan Right For Me?
Unsecured loans are a fantastic financial product because of their versatility and flexibility. Although, that doesn’t mean they’re right for everyone. Before making the decision to move forward with unsecured financing, take the time to assess your finances and goals. Once you do that, the decision of whether to use unsecured financing should become much clearer.
