Sandra MacGregor
Siddhi Bagwe
Personal loans, also known as consumer loans allow you to borrow funds from a lender to cover personal expenses or consolidate higher-interest debt. When you sign a personal loan agreement, you accept to pay back the funds plus interest on a set payment schedule.
How personal loans work
When you take out a personal loan, you borrow money from a bank, credit union or alternative lenders — such as an online broker or payday lender that you must pay back with interest over agreed regular payments.
Personal loan amounts can vary widely. You can borrow $100 to $50,000 on varying repayment terms of six to 60 months, or longer in some cases. Personal loans can be secured — guaranteed with collateral or unsecured.
Common personal loan uses
Most personal loans don’t have strict rules around how the funds can be used. Common uses include:
- Consolidating high-interest debt.
- Paying for unexpected expenses such as emergency car repairs.
- Home renovations.
- Large expenses like a vacation or wedding.
How to apply for a personal loan in Canada
Canadians have many ways to get a personal loan as long as they meet the lender’s requirements and are aware of the application process.
What you need to get a personal loan
Personal loan lenders generally require you to:
- Be the age of majority in their province or territory.
- Present a government-issued identification.
- Provide proof of a steady income and an active Canadian bank account.
- Show a proof of residence.
- Have a credit score.
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A good credit score is typically 660 and above. Credit scores help lenders determine whether the applicant is likely to repay the loan. A lender may also consider the applicant’s debt load and refuse to offer the loan if there is too much pre-existing debt.
How to get a personal loan
If you’re applying for a personal loan with one of Canada’s big national banks or a credit union, you can generally go into a branch and apply in person. Be sure to bring the required documents along. You may also have the option of applying online or over the phone.
Alternative lenders such as online loan brokers might allow you to apply online but expect you to scan and upload any required documents for verification. After you apply, the lender may instantly send a confirmation that your application was received, but take a few days until they decide the outcome. However, some lenders boast response times as quick as 15 minutes.
Nerd tip: When your personal loan application is approved, make sure to read the loan agreement carefully before you sign. Pay special attention to the amount of the loan, the interest rate, the term and additional fees. To avoid any surprises, enter these details into an online loan cost calculator and make sure you have an accurate understanding of the overall cost of your loan.
Where to get a personal loan
Canadians can borrow money from various financial institutions based on their credit rating and the type of personal loan they choose to apply for.
Big 6 banks. Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC) and National Bank of Canada (NBC) all offer personal loans. These banks have strict loan guidelines and generally prefer to offer loans to borrowers with good credit scores. Some banks may offer both secured and unsecured loans.
Credit unions. Much like the big banks, credit unions tend to favour borrowers with good credit scores when approving unsecured and secured personal loans.
Private lenders. Sometimes called alternative lenders may not have to work within the same tightly regulated scope as traditional big banks. This flexibility allows them to offer private loans even to borrowers with shaky financial histories or lower credit scores — but that comes at a price. Private lenders typically charge additional fees and higher interest rates than traditional banks.
Online lending platforms and brokers. Another form of alternative lender is an online-only lending platform or loan broker. Once the borrower enters their personal, based on their needs and eligibility, they get several offers from different lending companies. Online lending marketplaces like Borrowell offer more options to choose from without having to manually apply to each one. However, they may also charge additional fees and higher interest rates than banks.
Considerations when comparing personal loans
The devil is in the details. It’s crucial to pay special attention to some areas of your loan agreement before signing it, including:
- Terms of repayment. The terms indicate how many months or years you’re expected to take to pay back the loan. It also spells out how often you’ll make payments, such as weekly, bi-weekly or monthly.
- Interest rate. A lower interest rate can save you a substantial amount of money over the course of your loan. This section should also specify whether your loan’s interest rate is fixed (won’t change over the term) or variable (changes based on the lender’s prime rate).
- Fees. Extra fees are more common with alternative lenders. They may also be difficult to understand, so don’t be afraid to ask for clarification. Fees can include late payment fees, early prepayment fees and loan establishment fees — which can add up significantly as it can be a percentage of your overall loan.
- Borrowing limits. Each lender has a minimum and maximum amount that you can borrow. Check the loan agreement for the amount you’re borrowing and make sure it’s not more than you need — or can afford to pay back.
- Collateral requirements. Some lenders may give you the option of providing an asset as collateral to secure your loan, which could result in a lower interest rate. Unsecured loans are easier to get but typically have higher interest rates.
Alternatives to personal loans
If your application isn’t approved, or you’re wary of borrowing a large lump sum, these alternatives to taking out a personal loan may be worth considering.
Personal line of credit
A personal line of credit is similar to a personal loan in that you’re borrowing money, but instead of a lump sum, you can borrow only as much as you need at a time. This borrowing option can potentially save you money because you’ll only pay interest on the money you withdraw from the account — not on the full amount you’re approved to borrow.
With a line of credit, you’ll need to make minimum required payments, and you can pay back the full amount owing at any time. However, these flexible repayment terms can make it tempting to overspend or take longer than you really need to pay off what you owe.
Credit cards
Credit cards are another alternative to personal loans. With a credit card, you charge purchases to the card and enjoy an interest-free grace period of about 21 days. When the payment is due, you can pay the minimum required amount or up to the full balance on your statement.
However, credit cards come with high interest rates — typically much higher than those of personal loans. If you don’t pay off the balance in full each month, the high interest rate can cause your debt to grow very quickly.
Borrow from family or friends
Borrowing money from family or friends is an age-old option. Your loved ones may not even charge you interest, which could save you a significant amount. However, defaulting on the debt or missing repayments could cause a major rift in a relationship.
It’s a good idea to make your agreement official by writing down the terms of this loan and agreeing how and when you’ll repay it — and what will happen if you’re late.
Frequently asked questions about personal loans
Personal loans, also known as consumer loans allow you to borrow funds from a lender to cover personal expenses or consolidate higher-interest debt. When you take out a loan from a bank, credit union or an alternative lender, you must pay back the borrowed money with interest over agreed regular payments.
The documents required for a personal loan application are:
- Completed application form.
- Government-issued identification.
- Proof of address.
- Proof of income or employment.
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Personal Loan Rates in Canada
Personal loan interest rates can be either fixed or variable. Your rate depends on factors like your income, credit score, term, type of loan and more.
What is an Unsecured Personal Loan?
An unsecured personal loan doesn’t require collateral and typically has a faster approval process. However, it may come with higher interest rates.
Personal Loan vs. Line of Credit: How to Choose
The difference between a line of credit and a loan is that a loan is borrowed as a lump sum, while a line of credit can be used and repaid on an ongoing basis.