How much does a personal loan cost?

The cost of a personal loan can vary quite a bit depending on multiple factors. Generally speaking, to calculate the cost of a personal loan, you need to know the following:

Interest rate

Loan interest rates are either fixed or variable. With fixed interest rates, your payments remain the same over the duration of your loan. Variable rates will fluctuate depending on your lender’s prime rate.

Annual percentage rate

The annual percentage rate (APR) represents the cost of a loan, over the course of a year. APRs are often higher than advertised interest rates, because they include fees and other costs, and in that way, they can help you choose between loan options.

Let’s say you want to get a personal loan for $5,000 and repay it over three years. You reach out to two lenders, and get the offers seen in the table below.

APR vs interest rate

	Personal Loan 1	Personal Loan 2
Interest rate	10%	11%
Lender fee	$150 (3% fee)	$100 (2% fee)
Monthly payment	$161	$164
APR	12.1%	12.4%
Total interest	$808	$893

At first glance, the interest rates and monthly payments look very similar. But when the different lender fees are factored in, you can see that Loan 2 will end up costing you almost $100 more in interest over the life of the loan.

Nerd Tip: Pick the loan with the lowest APR for a given loan term, if you can, because it’s always the cheapest option. Note that APR loans in Canada can’t exceed 60%. However, payday lenders are exempt from this rule.

Additional fees

Depending on where you get your loan, there may be additional fees, including:

Administration fee. This is the cost of setting up your account
Non-sufficient funds fee. If your loan repayments are automatically withdrawn from your bank account, and you don’t have enough funds, you’ll be charged a fee.
Late fee. If you miss a payment, a fixed fee or a percentage of the unpaid payment will be added to what you owe.

How to shop for a personal loan

When considering a personal loan, it’s always worthwhile to shop around. That’s because every loan is different. You want a loan that aligns with your goals and gives you options. Consider the following when comparing personal loan options:

Monthly payment and interest rate

Quite often, people considering a loan will focus on the monthly payment. This is a reasonable thing to do, as any amount of debt will affect your monthly budget. However, any loan can look affordable if you stretch out the terms. That’s why you need to look at both the monthly payment and how much you’ll be paying over the entire term.

For example, let’s say you’re considering a loan of $30,000, and you’ve been presented with three different quotes:

4% interest for 7 years. Your monthly payment will be $410.06
5% interest for 5 years. Your monthly payment will be $566.14
6% interest for 3 years. Your monthly payment will be $912.66

The first option gives you the lowest monthly payment, but you need to calculate the total cost of the loan over the course of the term, which would be as follows:

$34,445.04
$33,968.40
$32,855.76

As you can see, going for the shorter-term loan with the higher monthly payment would actually cost you the least in the long run.

Additional considerations

Besides the interest rate and monthly payments, you’ll also want to consider the following when choosing a lender:

Additional fees. What are the additional fees, if any, for accepting a loan?
Payment schedule. Can you prepay your loan early or change the payment frequency without penalty?
Reputation. Is the lender a financial institution with a positive reputation?

Always read the details of your loan contract before signing. If an offer sounds too good to be true, it probably is.

What can a personal loan be used for?

Personal loans in Canada can be quite flexible since you can use them for many different things. Some of the most common uses for a personal loan are as follows:

Debt consolidation. Many people will consider using a personal loan to reduce their debt. That’s because personal loans often come with an interest rate that’s lower than high-interest debt such as credit cards.
Home renovations. Depending on the size of your project, home renovations can be costly. A personal loan would allow you to make upgrades at a reasonable interest rate. The hope is that when you sell your home later, the increased property value due to your renovations is worth more than the interest you paid on your loan.
Auto purchase. Although most auto dealers offer financing, the terms may not be ideal. Getting a personal loan for the purpose of purchasing a car could make financial sense.
Continuing education. Getting a student/personal loan can be common for people that are looking to study but may not qualify for traditional student financial aid. The funds you get can be used to pay your tuition, books, housing, and more.
Travel. While taking on debt to travel isn’t normally advised, a personal loan does charge less interest than most credit cards. If you’re going to put that vacation on credit, you might as well try to keep your costs down.

What a personal loan can’t be used for

Personal loans can be used for just about anything, but there are a few things they can’t be used for.

Mortgage down payment. In Canada, you must have a minimum down payment of 5% when buying a home. You can not borrow this money.
Loaning out the funds with an interest rate above 60%. The criminal code bans loans with an interest rate above 60%. So you couldn’t borrow money and then try to lend it to someone else with a rate about that amount.

What’s a good interest rate on a personal loan?

Generally speaking, a good interest rate is the lowest rate you can get from a lender. That said, every lender has different criteria when determining if they’ll approve you for a loan and how much interest they’ll charge you. In most cases, lenders look at the following:

Fixed or variable interest rate. Variable rates are typically lower than fixed rates, but they could change during your term based on the Bank of Canada’s policy interest rate.
Your credit score. A high credit score is essential since it shows the lender that you’re creditworthy.
Income. If you have a stable income, lenders will likely feel more confident about your ability to repay the loan.
Loan amount and term. Lenders may offer different rates based on the loan and amount, and term.
Unsecured personal loan vs. secured personal loan. If your loan is tied to an asset, such as your home, you’d likely be offered a lower interest rate.

In most cases, if you have a good credit score and stable income, you’ll be approved for a personal loan with a lower interest rate. For those with a poor credit history or lower income, the terms offered for a loan may not be favourable.

Which lenders provide personal loans?

Many different lenders provide personal loans. While some are obvious, there are some lenders that you may not have been aware of that could offer you a loan that fits your needs.

Traditional financial institutions. When looking for a personal loan, most people will consider a bank or credit union first. They’re well-established, trustworthy, and have branches that you can walk into for assistance. While traditional financial institutions typically offer good rates, they tend to be more strict about their lending criteria.
Online/direct lenders. Some lenders operate online only. This could include digital banks such as Simplii, or lenders that don’t have storefronts. Since these lenders have lower overhead costs compared to traditional banks, they can pass on those savings to consumers in the form of lower interest rates.
Private and alternative lenders. There are private and alternative lenders that have lower criteria when qualifying people for a personal loan. That said, these lenders will likely charge you higher interest rates and fees since they’re taking on more risk.

Personal loan alternatives to consider

If you don’t want a personal loan or don’t qualify for one, you still have some options. It just depends on your personal situation and what you need the money for.

Car loan. Most auto dealers have their own financing options. This type of loan can only be used to purchase a vehicle.
National student loans. Every province and territory offers student loans with favourable interest rates to eligible students pursuing post-secondary education.
Home equity line of credit (HELOC). If you own your home, you can borrow from the equity you’ve built by setting up a HELOC.
Home Buyers’ Plan (HBP). The HBP allows first-time homebuyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) to be used as a down payment.
Lifelong Learning Plan (LLP). You can withdraw up to $10,000 annually (up to $20,000) from your RRSP to finance continuing education for you or your partner.
Balance transfer credit card. Some credit cards allow you to transfer an existing balance to a new credit card with a lower interest rate.