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The Difference Between Personal, Private, and Payday Loans in Canada

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The Difference Between Personal, Private, and Payday Loans in Canada

Written by Caitlin Wood
Fact-checked by Caitlin Wood

The Difference Between Personal, Private, and Payday Loans in Canada

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Payday Loans Personal Loans Private Loans

Personal loans, private loans, and payday loans, why are there so many names for what seems like the same financial product? The easiest answer to that question is that each of these loans is a unique product meant to provide consumers with the funding they want depending on what their needs are. 

With so many different loan products on the market, it can be a confusing, stressful, and sometimes impossible process to choose which one best suits your financial needs. Understanding the differences and the pros and cons of these loans and how each one functions is the best way to weigh your options and make the most informed decision. 

Personal Loans

To try to help you have the best understanding of what a personal loan is so that you can make the right decision for your financial situation, let’s take a look at what defines a personal loan.

A personal loan is what you might think of as a run of the mill loan, either from a bank or another traditional financial institution. It’s a loan that’s not specifically given to purchase something like a house or a car. Someone might apply for a personal loan to help pay off high-interest credit card debt or to cover an unexpected emergency. 

Here are the main characteristics of a personal loan:

  • A credit check is typically required before approval
  • Loan sizes vary but are usually larger than both private and payday loans
  • They are usually larger because lenders perform more due diligence and therefore want a higher return (larger loan=higher return for the lender)
  • Personal loans are often installment loans with regular payments being made to the lender
  • The terms are set and the borrower knows when they’ll be done making payments 

While you can choose whatever loan you want, a personal loan is a great option for those who have moderate to high credit scores and who are looking for a relativity large loan. 

Secured vs. Unsecured Personal Loans

Under the personal loan umbrella, consumers can typically choose between secured and unsecured loans. The mains difference being that collateral or security, in the form of an asset, is required for a secured loan. The most common types of collateral are:

  • Your car
  • Your home
  • Another piece of property

Generally speaking, if you are unable to qualify for a personal loan because of poor credit or past financial mistakes, applying for a secured loan can increase your chances of approval. The reason for this is because lenders view you as a high-risk borrower, offering collateral can lessen the risk of lending you money.

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Private Loans

Now that you know what a personal loan is, let’s take a look at private loans.

Private loans can sometimes seem ambiguous which might even prevent you from applying for one. And while it’s true that private loans are very loosely defined, they are still an extremely valid and useful financial tool that anyone who is looking for a loan should consider.  

Here are the main characteristics of a private loan:

  • Generally, a credit check is not required
  • Funds are provided by a private individual, private creditor, or small business (not big banks or large financial institutions)
  • Versatile interest rates
  • Lenders are more interested in the whole story rather than  specific financial metrics 
  • Are usually smaller than personal loans but larger than payday loans 

If you’re concerned about your low credit score or past financial issues then a private loan maybe your best option. Private lenders are usually more willing to discuss your financial history and work out a deal with you, they rely less on credit scores and specific financial criteria. 

How can I find a private lender in my area?

One of the best ways to find a private lender is to receive a recommendation from some you trust. But, since this isn’t an option for most consumers, looking online is your next best option. There are countless online private lenders to choose from, just make sure you perform your own due diligence. When comparing lenders, make sure watch out for the following red flags:

  • Offers of guaranteed approval
  • Illegal interest rates
  • Asking for an upfront payment of any kind
  • Asking you to make a payment via gift card
  • Rushing your decision
  • No online or real-world presence
  • No online consumer reviews

Payday Loans

Payday lenders prey upon those who are in desperate situations and in need of quick access to cash. They advertise themselves as a convenient and reliable source for same-day funding. 

Here are the main characteristics of a payday loan:

  • Same-day approval
  • Extremely high-interest rates
  • No due diligence is done
  • Loans are provided based solely on whether the borrower has a job 
  • Must be paid back by next payday 
  • Typically loan sizes are very small 

Payday loans are almost always a bad idea as borrowers typically get stuck is what is referred to as the payday loan cycle. This is when a borrower needs to keep taking on more and more debt just to cover the cost of their payday loan(s). 

The Payday Loan Cycle

Payday Loans vs. Personal Loans: What Happens to Your Credit?

Payday loan providers don’t check your credit as part of the application process, so if you have bad credit this isn’t an issue. They also likely won’t report your payments to the credit bureaus, unless you miss a payment or default on the loan altogether.

Personal loan providers, however, may ask to perform a credit check as part of their application process, although some may not. They will report your payments, both good and bad to the credit bureaus. This means, for consumers who are looking to improve their credit, a personal loan can be a great tool to use.

How to Choose Which Loan is Right For You

Personal loans and private loans are without a doubt your best options. They’re easy to apply for, easy to pay off and won’t ruin your finances. With that being said, here are some important questions you should consider when choosing a lender to work with:

  • How much money do you need?
  • When do you need the money?
  • Is the interest rate too high? Or is it manageable?
  • Does the lender check credit?
  • Does the lender report to the credit bureaus?
  • How much is the total cost of the loan?
  • Will your loan payments significantly affect your monthly budget?

Frequently Asked Questions

What is the interest rate of a payday loan?

Depending on the province you live in, the cost of borrowing $100 via a payday loan is as follows:
  • British Columbia – $15
  • Alberta – $15
  • Saskatchewan – $17
  • Manitoba – $17
  • Ontario – $15
  • New Brunswick – $15
  • Nova Scotia – $19
  • Prince Edward Island – $25
  • Newfoundland and Labrador – $21
Keep in mind that these are not the annual percentage rates. The APR of a payday loan is often upwards of 500%.

What is the interest rate of a personal loan?

Because personal loans can be personalized based on the borrowers’ financial circumstances, interest rates vary greatly. But, generally speaking, interest rates range from 5% to 56%.  Legally in Canada, the maximum interest rate that a lender can charge is 60% (payday lender are exempt from this law).

What type of loan should I choose if I have bad credit?

Contrary to popular belief, consumers with bad credit have multiple options to choose from when it comes to applying for a loan.
  • Lenders who do not check credit
  • Lenders who check credit but specialize in working with bad credit borrowers
  • Secured loans
  • Guarantor loans

Bottom Line

Choosing between a personal loan, a payday loan, and a private loan should be based on personal preference and your current financial situation. Keep in mind that payday loans are typically the worst choice. Taking on debt that you cannot afford can cause serious financial issues down the road, always look for a lender who has a good reputation, offers a solution that fits into your budget, and who you is easy to work with.


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