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!
Borrow Up To $50,000
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.
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.
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.
Spring Financial is an online consumer lending company that offers innovative financial and credit-building solutions designed to give Canadians the opportunity to build credit, save money and borrow responsibly.With many Canadians struggling with high-interest debt and limited financing options, Spring Financial strives to provide Canadians with affordable and accessible financial products that can help them achieve greater financial freedom. Among their growing suite of smart money solutions, Spring Financial offers $1,500 cash advances, personal loans up to $35,000, and a credit-building program that helps you build credit and save money.
Available in seven provinces, iCash is an online source of fast, small loans that can be used for any emergency. Approved applications are processed within the same day and no documentation is required before the transfer of your funds. You can borrow up to $1,500 with iCash. Every time you pay the loan back following the agreed-upon deadline, you become a more reputable borrower. The increased trust allows you to borrow more each time. iCash uses a Trust Rating System, an algorithmic function that determines your merit as a borrower.
If you’re looking for an open-ended line of credit with credit limits up to $15,000, Fora is the best choice. Fora’s line of credit lets you withdraw funds from your available credit, and repay and redraw as needed. This makes it an excellent option for those seeking flexibility and quick access to cash as needed.Moreover, interest rates start as low as 19.9% and are only charged on the amount you withdraw.
The MogoMini line of credit offers Canadian consumers a great personal loan alternative. Borrowers can access up to $5,000, spend what they need when they need it, make the automatic minimum payments, and finally control their own principal payments. This Mogo product is flexible and users can test drive their line of credit for 100 days to see if it’s the right fit. Access their easy online application via your MogoMoney dashboard and get pre-approved in 3 minutes with no impact on your credit.
Fairstone is a great choice for consumers looking for loans with affordable payments that meet their needs and budget. As Canada’s leading non-bank lender of personal loans, consumers can get unsecured loans up to $25,000. Homeowners can choose a secured loan (backed by the value of their house) to borrow more money and access lower payments compared to an unsecured loan. Whether you’re looking to consolidate debt into one simple monthly payment, cover unexpected expenses or something else altogether, Fairstone is a great option.
Money Mart is a Canadian financial services provider that specializes in offering short-term financial products, including payday loans, cheque cashing, wire transfers, and installment loans. They're available both in person and online, providing borrowers with different options to apply for loans and access their borrowed funds. Their Payday Boost products are available for up to $1,500, and installment loans are available for up to $18,000. They're known for their easy-to-use services and same-day cash options, making Money Mart a great option for those who have little time to wait for much-needed funding.
SkyCap Financial has been helping Canadian consumers take control of their financial futures since 2013. Their main goal is to provide alternative financing to all Canadians, regardless of their financial past or credit history. They provide fast and easy short-term loans ranging from $500 to $10,000 and approve applicants in as little as 24 hours. Consumers can take advantage of SkyCap Financial’s quick application and a team of experienced individuals who strive to make your experience as smooth as possible. SkyCap Financial bases all their lending decisions on three main factors, current income, credibility, and stability, so they can approve more Canadians, especially those who have been rejected in the past based on credit issues.
If you’re short on cash, Bree offers cash advances of up to $500 with zero interest. Bree is an online financial platform that provides interest-free cash advances to help consumers avoid overdrafts and NSF fees. Their mission is to be a dependable and accessible financial source that consumers can trust when they need financial support. Moreover, you can access the money you need with Bree without having to worry about credit checks, interest charges or late fees.
Nyble helps users quickly access a line of credit of up to $250 without credit score requirements. This is a good option for anyone who wants to avoid overdrafts or needs a small amount of cash quickly. Approval is instant and funding takes up to 3 days. But if you upgrade to a paid membership for $11.99 a month, you can receive your money within 30 minutes. Nyble reports your payment history to the credit bureau monthly and approves you for large amounts as you build trust with the platform. You can also track your credit score, earn reward points for improving your score, and access other features such as credit monitoring and digital identity theft protection.
Cash Money has been helping Canadians access easy and quick loans for more than 30 years. They offer payday loans, personal loans, and line of credit loans from $1,500 to $10,000. User will enjoy their simple online application, personalized options, and same-day funding. Whether you need to cover an emergency expense or simply need to make it to your next payday, Cash Money can a variety of options to meet your needs.
LoanMeNow offers Canadian consumers quick access to the cash they need. They offer loans up to $1,000 with no credit check required. Funds are deposited directly into your bank account within as little as 24 hours. A short-term loan from LoansMeNow can help you cover the cost of an unexpected expense or tide you over until your next paycheque. Whatever your financial needs are, LoanMeNow’s quick approval time means you’ll be able to get back on track as soon as possible.
GoPeer is a peer-to-peer lending platform that connects borrowers with individual investors who fund loans. Through GoPeer, you can get a personal loan for up to $35,000, with flexible repayment terms and competitive interest rates. Interest rates start at 8.99%, depending on your credit profile. GoPeer's unique peer-to-peer model allows consumers to benefit from a more personalized borrowing approach. The online application process is quick and easy, and funds can be deposited into your account in as little as 7 days.
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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.
Frequently Asked Questions
How much can I borrow with an unsecured loan?
There is no universal limit, lenders vary on their maximum borrowing amounts. However, many institutions do not lend more than $50,000 and usually keep their unsecured loans between $1,000 and $10,000.
What’s better, a secured loan or an unsecured loan?
The main difference between a secured and unsecured loan is collateral. Secured loans have collateral whereas unsecured loans do not. Neither option is better than the other. The best option depends on your unique financial circumstances and goals. As a rule of thumb, secured loans are better if you have an asset of significant value because you’ll be able to secure a lower interest rate and be less fearful of repercussions if you default. On the other hand, if you don’t have a valuable asset to use as security, unsecured loans are always available. Again, these are simply basic guidelines. The option that will work best for you depends on your circumstances and goals.
What if I miss a payment on my unsecured loan?
If you miss a loan payment, do your best to remain calm and act quickly. Your first course of action should be to communicate with the lender. Explain your situation and try to work out an extended due date or a repayment plan with the lender. The longer you wait to communicate with the lender, the more likely it is that the lender will escalate the situation. Keep in mind that if you think you won’t be able to make your payment on time, contacting your lender before you miss it is the best option.
Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.
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