Sometimes, it takes more than thrifty spending to make ends meet. If you’re a consumer who needs an infusion of cash, you might wonder if you can get an unsecured personal loan in Canada.
Well, the short answer is, “Yes.” Still, you’ll have to qualify. Keep reading to learn more about unsecured loans.
What Are Unsecured Loans?
If you have a financial emergency or need funding for some other reason, an unsecured loan might help you out of a stressful situation—if you’re the right candidate for the product.
An unsecured loan is a debt instrument. Lenders issue unsecured loans to consumers and businesses.
Your ability to receive an unsecured loan is based entirely on your creditworthiness. In other words, a lender will evaluate your credit before considering you for an unsecured loan.
If approved, you’ll receive funds without the need to pledge property or other assets for collateral. For example, you might use a home or vehicle for collateral for different types of loans.
Check out our chart below if you’re wondering how your credit score fares against others.
Unsecured Personal Loans in Canada: Points to Ponder
In the face of rising inflation and expenses, it’s understandable why you might have interest in an unsecured loan. However, there’s a trade-off for accessing funds with an unsecured loan. Again, that trade-off is that your ability to get an unsecured loan rests entirely on your credit history.
You can receive favourable loan terms like lower interest with a high credit score. But, conversely, if you have a lower credit score and still manage to secure an unsecured loan, you’ll pay higher interest rates. In this way, lenders receive compensation for the additional risks involved in lending money.
Still, an unsecured loan will almost always have a higher interest rate than a secured loan. A lender can recover any losses with a secured loan by selling pledged assets.
However, lenders don’t have this ability with an unsecured loan. As a result, they’ll charge higher interest rates for assuming additional risk.
Unsecured Loans Versus Traditional Loans
Again, an unsecured personal loan in Canada doesn’t require collateral. So from your perspective, it’s less risky. You don’t have to worry about losing your home or vehicle if you can repay the loan.
Conversely, the structure of an unsecured loan presents more risk to lenders. In addition to charging a higher interest rate, they require a higher income and credit score to qualify for an unsecured loan.
With traditional loans, like Canadian home loans, you’d provide collateral. Your home or another valuable asset would become the bank’s property should you become unable to make loan payments.
In most cases, the home that you’re purchasing will become the collateral. With this arrangement, a lender has something to fall back on if you can keep up your end of the agreement.
Costs for an Unsecured Loan
Technically, there’s no standard amount for an unsecured loan. However, most institutions limit unsecured loans to $1,000-$20,000.
A lender might even issue an unsecured loan for as much as $50,000. Also, the loan repayment term might last anywhere from six months to five years.
In addition, you may incur fees in addition to interest with an unsecured loan. For example, a lender might charge an origination fee. This fee will cover the lender’s costs for processing the loan.
It’s also essential to determine if an unsecured loan might include other fees. For example, you should always ask a lender if there are insufficient funds fees or early repayment penalties associated with the loan.
What if I Have Bad Credit?
It’s possible for Canadian consumers to qualify for an unsecured loan, even with bad credit. First, however, you’ll need to locate a lender specializing in this kind of funding.
A lender specializing in bad credit loans will charge a higher interest rate. Also, fewer financiers operate in this space.
Nevertheless, you can find unsecured loans in Canada with bad credit. A simple online search for unsecured loans with bad credit for your area will show you what options are available.
Applying for an Unsecured Loan
Several sources provide unsecured personal loans in Canada. These sources include:
• Financial Technology (Fintech) companies
• Online banks
• Private lenders
• Traditional financial institutions
Again, an online search for lenders in your area will show you your options.
Still, you must research any lender before accepting a loan. It’s vital to ensure that you’re dealing with a reputable lender.
Remember to thoroughly research a lender to avoid surprise fees and interest rates.
Once you’ve found a lender, you might secure one of several types of loans, each with different features, functions, and purposes. The three main unsecured loan types are consolidation, revolving, and term loans.
A consolidation loan is a special kind of unsecured loan. It enables you to pool your outstanding debt. For instance, you might use a consolidation loan to combine your:
• Credit card
• Phone bills
• Utility bills
• Other expenses
You’d pay off these combined expenses with a single loan.
Once you’ve paid off your debt and expenses, you’d pay off the consolidation loan just as you would a term loan. The advantage of a consolidation loan is that you can pay off your new debt at a lower rate compared to paying off your outstanding debts.
A revolving loan is like a credit card. You’d receive a pre-established balance that you can access anytime with a credit card.
You can use your credit card to borrow money, pay it back, and then borrow it again. Your only limitation is the maximum upper limit of your credit card.
An unsecured personal line of credit works much the same way. It’s ideal for short-term needs.
An unsecured personal term loan in Canada works much like traditional home loans. However, the lender will give you the loan proceeds in a lump sum.
You’ll receive the proceeds at the beginning of the loan term. You’ll then make either monthly or biweekly repayments.
The repayments will continue until you’ve paid off all the principal and interest. This kind of payment structure is also typical with most secured loans.
Finally, there are payday loans. A payday loan is a short-term loan. You can use it to cover an immediate need due to a shortage in your cash flow.
However, payday loans most often have a much lower upper limit. As a result, the most you can usually borrow with a payday loan is a few hundred or a few thousand dollars.
You must apply for a payday loan from a payday lender.
It’s important to exercise caution with payday loans. You should not accept a payday loan unless you’re sure you can repay it within the terms of the original contract.
If you default on payments or must extend the loan, interest charges for a payday loan can accumulate quickly. Some people get trapped in payday loans for so long that they end up paying much more than they originally borrowed.
Qualifying for an Unsecured Loan
Remember, an unsecured loan does not require collateral, and lenders assume more risk when issuing this kind of financial instrument. As a result, you’ll typically need a higher than usual credit score to qualify for a standard unsecured loan.
For instance, you might consider paying your credit card in full each month to improve your credit standing. If so, you’ll most certainly stand out from the crowd. For example, look at the percentage of Canadians who pay their entire monthly credit card bill below.
Lenders look at quite a few criteria before offering unsecured loans to borrowers. These criteria include:
• A good credit history
• Strong history of debt repayment
• Steady income from a job
It’s important to understand that not everyone gets approved for an unsecured loan. However, in some instances, a cosigner may help you get approval for this kind of loan.
Concerning Your Credit
If you apply for an unsecured loan, a lender will closely look at your spending and repayment patterns. The lenders want to know that you manage your money wisely.
For instance, you might have a strong history of paying back loans and debts on time. If so, you’ll have a higher credit score.
If not, however, you may have poor to no credit. It’s impossible to rebuild your credit quickly when you need money fast. It’s crucial to establish a pattern of paying bills on time for this reason.
Do You Need a Cosigner?
Most often, a cosigner isn’t a part of an unsecured loan arrangement. However, there are some exceptional cases.
A lender might ask for a cosigner for an unsecured loan during these rare occurrences. In this instance, you’re still responsible for repaying the loan. However, your cosigner must repay the loan if, for some reason, you cannot.
Proving Your Income
When it comes to unsecured loans, your income is worth a separate mention. Your income can prove just as important, if not more important, than your credit score.
If you want an unsecured loan, you must have a steady salary. You must show lenders that you have a predictable source of income.
A steady income shows lenders that you’re a responsible consumer and can meet your daily needs. However, it also indicates that you’ll still have the income to repay your unsecured loan.
Understanding Loan Rates
There are two kinds of loan rates. An unsecured loan might have either a fixed or variable rate.
If your unsecured loan has a fixed interest rate, the interest rate and payments will stay the same every month. In addition, the prime rate will not affect the interest rate of your loan. Also, you’ll know exactly when you’ll pay off the loan if you make all payments on time.
Pay Close Attention to Variable Rates
A variable rate loan, however, is much different. For example, the interest rate of your unsecured loan will change whenever the prime rate changes. Here, however, is where things can get tricky with a variable rate loan.
Your loan payments will remain the same.
Imagine that the interest rate decreases. In that case, more of your payment will go towards the principal.
The principal is the amount that you owe, not including the interest. In this scenario, you might pay your loan off faster.
Now, suppose the prime rate increases. In that case, more of your payment will go towards the interest. It will take you longer to pay off your loan if this happens.
The Pros of an Unsecured Loan
Despite a higher interest rate, an unsecured loan can provide several advantages. An unsecured loan can help you manage expenses and the uncertainty of the new normal. It might serve your needs well if you need a small-to-medium-sized loan.
Another advantage of an unsecured personal loan in Canada is that it’s a non-recourse product. Non-recourse means that you won’t have to surrender your assets, like your home or vehicle, if you cannot make your loan payments on time.
However, don’t make the mistake of thinking that this circumstance frees you from all responsibility if you can’t repay your loan. A lender can take you to court. If the lender wins and proves that you owe an outstanding balance, the courts could still attach your assets or even garnish your wages as a means of repaying the loan.
The Drawbacks of an Unsecured Loan
An unsecured loan also has disadvantages. These disadvantages apply to both businesses and consumers.
Again, an unsecured loan will have a higher interest rate in most circumstances compared to a standard loan. There’s a higher risk element for lenders, so they charge more interest for this kind of loan.
Ultimately, you’ll pay more for an unsecured loan than a secured loan in the same amount of time.
Also, it’s challenging to qualify for an unsecured loan. You or your business must have a good credit history to be eligible for this financial product. Otherwise, a lender will reject your application.
You Can Always Learn More About Managing Your Money
Now, you know a bit more about unsecured loans in Canada. Hopefully, you’ll never need an unsecured loan for an emergency. However, you can avoid finding yourself in this position by learning sound financial management.
You can indeed enjoy better financial health by learning more about managing your money. If you want to learn more about managing your finances, Creditpicks can help.
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