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Personal loans are one of the most popular financial tools among Canadian consumers. They offer the opportunity to cover a wide variety of expenses, from unexpected travel to unfortunate car issues. While finding the best personal loan to meet your unique needs may seem like a difficult task, the good news is that more Canadian lenders are offering this product than ever. For everything you need to know about the best personal loan options in Canada and how to choose the best fit for your finances, keep reading.
What Is A Personal Loan?
In many of our previous articles, we’ve talked about all kinds of loans and how they can benefit you in your day-to-day life. However, if you’re reading this, it’s possible that you’ve only just started thinking about getting a personal loan and have never read up on them. Don’t worry, you’re not the only one. For those who are unfamiliar with the subject, personal loans themselves are simple enough to understand.
Essentially, a personal loan is a predetermined amount of money that can be acquired through any lender, such as a bank, credit union, trust company or private lender. Once you, as the borrower, have chosen a suitable lender, you’ll go through an approval process, wherein you’ll fill out an application detailing your personal and financial information, as well as what you intend to use the money for (if you lender requires this, but many do not). If your application is approved, you’ll be granted a certain amount of loan money. You’ll then have to pay back your lender through regular installments, including interest, over a designated payment schedule. Once your debt is paid back in full, you can choose to remain with your current lender for further products and services, or close your account and move on.
Personal loans can be used to pay for numerous expenses, including but not limited to:
- Educational costs (classes, school supplies, student housing, etc.)
- Car related expenses (repairs, modifications, accidents, etc.)
- Homeowner related expenses (additions, maintenance/repairs, appliances, etc.)
- Wedding-related expenses
- Funeral-related expenses
- Groceries and other consumer goods
- Consolidation of other debts (credit cards, cell phone/landline bills, internet and utility bills, etc.)
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Secured vs. Unsecured Loans
While we’re on the subject, it’s good to learn about the two types of loans you can get.
The first is known as an “unsecured” loan. It’s called “unsecured” because it involves no collateral, only money. So, if you don’t make your monthly payments, you’ll be charged a penalty fee and your interest rate will go up. However, the penalty won’t be weighed against any of your assets, which can be your home, car, or another piece of valuable property you own. Since unsecured loans don’t involve collateral, the interest rate you get is likely to be higher than that of a secured loan. Depending on the size of the loan, you may also need to have a better income, healthier credit, and even a co-signer before you’ll be approved.
“Secured” loans, on the other hand, do involve collateral. When you want a relatively large amount of loan money, your lender will need more reassurance that you’ll pay them back. One way of reassuring them is by offering up one or more assets as compensation in the event that you default on your payments for too long. While doing this often gives you a better chance of being approved for a large loan and a lower interest rate to go with it, be extremely cautious. If your debt grows too large and you can’t make your payments, your lender has the right to seize your assets.
What Does The Personal Loan Application Process Look Like?
When it comes to determining a potential borrower’s creditworthiness, keep in mind that every lender’s process is different. Most major banks or “prime” lenders, for instance, have strict regulations to adhere to when it comes to their application and approval procedures. Their borrowers often need a higher level of creditworthiness to qualify, higher than “subprime” (who cater to those with poor credit) lenders require.
What do we mean by “creditworthiness”, you ask? Creditworthiness refers to a potential borrower’s financial strength, particularly their likelihood of managing their regular payments properly. In other words, how much of financial risk they would be with the loan money they would potentially be granted. The better their qualifications are, such as having good credit and a solid source of income, the better their level of creditworthiness and chances of approval will be. On the other hand, if their qualifications are considered low, meaning they have poor credit and/or an unstable source of income, their level of creditworthiness will lower and with it, their chances of approval.
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Now, as we just mentioned, every lender’s application process will vary slightly. However, most lenders examine a few key factors when it comes to approving a borrower. Some areas that the majority of lenders look include, but aren’t limited to:
- Gross monthly/yearly income
- debt-to-income ratio
- Employment history, both past, and present
- Credit report, credit score, credit rating, and credit history
- Record of debts, payments, and other credit-related accounts
When researching lenders, it’s also good to know that all lenders will offer personal loans of varying amounts. While many subprime or private lenders only offer loans from $300-$10,000, larger-scale operations, like banks, are usually in a position to offer more. So, another area where your creditworthiness will become especially important is how much money you’re asking for in the first place. Chances are that if you only need a small amount, you won’t have as hard a time qualifying as you would for a personal loan at the maximum borrowing limit.
Whoever they are, your lender wants to be certain of one thing, that you’ll be able to afford to pay them back. Since your own payment schedule could take place over several years, it’s essential to understand just how your loan payments can affect your finances.
For more ways to qualify for a personal loan, check this out.
What Will The Regular Payments Be Like?
That brings us to the next topic, the payments themselves. As we said, during the application process, you and your lender will agree upon a payment schedule, which you’ll stick to until your loan is paid back. Although it’s possible, most borrowers don’t plan on paying back their whole loan right away. Depending on the size of the loan, it may take a number of months, even years to pay back in full, and the entire time, interest will apply. So, the frequency of your regular payments is one of the first elements that need to be determined.
Again, when it comes to how they regulate their payment schedules, every lender is different. However, most lenders offer the following general payment options:
- Monthly (12 payments per year)
- Weekly (52 payments per year)
- Bi-weekly (26 payments per year)
The Interest Rate
Every loan comes with an “interest rate”, an extra amount of money that will be added to your regular payments. The interest rate is established so that your lender can earn a profit from your use of their services. The percentage they charge varies in accordance with the full amount of the loan, as well as how good your credit is and how much you’re borrowing in the first place.
So, before you apply, always consider your other general expenses, as a high-interest rate can certainly affect your finances. Do you have a mortgage or car loan to pay for? What about your other debts? Another consideration to take into account has to do with your credit score range and interest rate you’ll be given because of it, which we’ll discuss in a moment.
Fixed vs. Variable Rates
Generally, lenders offer two types of interest rates for their personal loans, known as “fixed-rate” and “variable-rate”. Both rates come with certain benefits and drawbacks, so make sure to consider them before you make your choice.
With a fixed-rate, your loan’s interest rate will be calculated in advance. Once it’s been approved, you’ll pay that same interest rate, meaning it won’t increase or decrease for the duration of the loan term. This type of rate can be beneficial because it never fluctuates, provided you make all your payments on time and in full. However, if you’re approved at a high rate, it will stay high until you manage to raise your level of creditworthiness for your future credit products.
A variable-rate, on the other hand, is going to fluctuate in accordance with the current market premium, otherwise known as the “prime rate”. This can sometimes be beneficial because if the prime rate goes down, you could save a decent amount of money over time. Then again, if the prime rate goes up during your payment schedule, the rate you’re currently paying will rise.
For further information about interest rates, check out our other article.
How Does My Credit Score Affect My Interest Rate?
Your credit score is another area where it pays to be prudent, especially if you want to get approved for credit products and get a favourable interest rate to go with them. As we’ve talked about in our previous articles, your credit score is a three-digit number, ranging from 300-900, that encompasses all your actions as a credit user, similar to a grade-point-average you receive at school.
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If you make responsible transactions with your credit products (credit cards, mortgages and other loans, lines of credit, etc.), such as timely and full payments, your credit score will rise. On the other hand, if you make irresponsible transactions, like late, short or missed payments, your credit score will drop. And, once your score drops, it can take a lot of time and effort to get it back to where it was before, so make sure to always be responsible with your credit products.
To find out why your credit score might have dropped, click here.
Along with your income, current debts, and credit report, the health of credit score is one of the main factors that almost all lenders use to determine both your creditworthiness and interest rate. The higher your credit score is, the less of a borrowing risk they’ll consider you, and the better (lower) your interest rate will be because of it. However, the lower your credit score is, the more of a borrowing risk you’ll be considered, and the higher your interest rate will end up being.
How Will My Credit Report Affect My Ability To Get A Personal Loan?
While your credit score affects the interest rate you’ll get, your credit report can affect your ability to get a personal loan as a whole. If your credit score is like your GPA, your credit report is like your report card. It’s a file that contains a record of all your actions as a credit user over a certain number of years. Every time you’ve used your credit card, opened an account for any credit product, or made any transactions using those products, that action gets recorded on your credit report.
When determining your creditworthiness, lenders will pull a copy of your report from one of Canada’s two credit reporting agencies, TransUnion and Equifax. Points that they’ll examine will be your other active credit accounts, the companies they’re open with and the debts you currently have with them, as well as any financial delinquencies you might have on your record. Delinquencies can include accounts that have been put in collections, as well as any debt management programs, consumer proposals, or bankruptcies you may have gone through recently. Just like your credit score, the healthier your credit report is, the better your chances of approval and a favourable credit score will be. The more irresponsible credit usage the lender sees (defaulted payments, delinquencies, etc.), the more of debt problem they’ll think you have and less likely you’ll be to get approved. In turn, if you do manage to get approved, a bad looking credit report can earn you a very high-interest rate.
What Is A Guarantor Loan And How Can It Help Me?
If you’ve applied for a personal loan in the past but your application was denied due to your bad credit, there is another loan option that might work out better for you. It’s known as a “guarantor loan” and involves finding a cosigner prior to applying. These loans are beneficial because your own bad credit will no longer be an issue during the application process. Instead, your approval will hinge on your cosigner’s credit health. That’s why, ideally, your cosigner would need to have good credit and a decent income. They would also have to agree to take on the responsibility of your loan payments in the event that you default (you can no longer make your payments on time for some reason). Be cautious before choosing this option, because if your cosigner also can’t keep up with their payments, their own credit and finances will suffer for it.
Once you’re approved, however, you should be able to secure a similar type of installment-based loan at a more reasonable interest rate than a typical bad credit loan. As an added bonus, even though your credit will not be factored in, you will still receive a credit score boost whenever you make a timely, full payment.
Improving Your Credit In 2021
In short, improving your credit is one of the first steps you should take before you start applying for personal loans, no matter how much you’re asking for. True, even if your credit score and rating are low, and your credit report is a bit worse for wear, there are subprime lenders out there who can grant you the personal loan you need. However, as we said, your interest rate can end up being extremely high, costing you hundreds, even thousands of dollars extra. So, if the present state of your creditworthiness is not where you’d like it to be, you can try to improve it gradually by:
- Getting a free annual copy of your credit report.
- Review it for errors and dispute any you find.
- Pay your bills on time and in full, whenever possible.
- If you can’t afford the full payment, at least make the minimum balance payment.
- Close any unused credit accounts.
- Pay off any other debts you may have, starting with the largest.
For more ways of improving your credit in 2021, read this.
Being Responsible With Your Personal Loan
Like we said at the beginning of this article, a good personal loan can help you in a lot of different financial situations, as long as you’re being responsible with it and managing your payments properly. Even a personal loan for a relatively small amount can land you in even worse debt than you were before if you start defaulting on your payments. Missed payments can lead to penalty fees. Penalty fees, coupled with a high-interest rate can lead to more debt, which can lead to your account being sold to a collection agency, maybe even worse.
Learn how to manage high-interest credit card debt.
However, if you make your payments on time and in full, not only can your personal loan get you out of some tough financial situations, but it’s also a credit-building tool. The more well-managed payments you make, the higher your credit score will be. If you already have a personal loan but think you might be in danger of defaulting soon, contact your lender immediately before things get worse. Together, you’ll be able to negotiate a more reasonable payment schedule. Then, once your personal loan is paid in full and your credit looks great, you’ll have no problem getting approved for any future credit products and low-interest rates to go with them.
Can I get a personal loan without a credit check?
What documents do I need to apply for a personal loan?
- Personal identification documents such as a driver’s license or passport
- Income verification documents such as pay stubs, bank statements or tax returns.
What interest rate can I get with a personal loan?
How do I increase my odds of qualifying for a personal loan?
How do I get a 100% guarantee approval for my personal loan?
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