A personal loan allows you to borrow money from a bank, credit union or alternative lender. The loan accrues interest and has a set repayment schedule.
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.
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.
Most personal loans don’t have strict rules around how the funds can be used. Common uses include:
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.
Personal loan lenders generally require you to:
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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.
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.
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.
The devil is in the details. It’s crucial to pay special attention to some areas of your loan agreement before signing it, including:
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.
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 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.
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.
