Loans are financial products that can allow you to make a large purchase and pay for it over time. Banks and credit unions are both popular places to get loans for a number of needs including personal loans, car loans and mortgages (home loans).
Knowing what type of bank loan will meet your needs is the first step in figuring out how to apply and get approved.
Types of bank loans
There are several types of bank loans available to Canadians depending on what their financial goals are. Some of the most common types of bank loans include:
Mortgages: These are loans used to buy a house or other property. Mortgages usually require an extensive application process. Mortgage terms tend to be longer than other types of loans, with amortization periods ranging from 10 to 25 years.
Car Loans: These loans are used to purchase a vehicle. Many banks and credit unions offer flexible payment options on car loans, but, like a mortgage or personal loan, the entire amount plus interest is expected to be paid back in a set period of time based on a predetermined payment schedule.
Personal Loan: These loans are used to borrow a fixed amount of money that you’re required to pay back over a set period of time in regular payments that include interest and possible fees. Personal loans can be used for just about anything, like home renovations, debt consolidation, or even a big expense like a wedding. Personal loans usually have terms between six and 60 months.
Business Loan: A business loan works similarly to a personal loan except it’s designed to finance business-related costs and expenses. If you start a small business, you may need to seek a business loan.
Line of Credit: A line of credit isn’t exactly a loan but it is a borrowing option offered by most banks and credit unions. A line of credit works a lot like a credit card: you apply once and if approved you are given a limit that you can borrow against as needed. You are only charged interest on the amount that you borrow and there is no deadline to pay back the funds. There are lines of credit for personal use, businesses, and students.
Bank loans can be either secured or unsecured. Secured loans tend to have lower interest rates because they’re tied to a piece of collateral (like a house or a car). Unsecured loans have higher interest rates because they aren’t tied to collateral and are seen as riskier to the lender.
» MORE: How to open a bank account
How to borrow money from a bank or credit union
Once you have figured out what kind of loan you need, you will have to apply for it. This can be done online or in person. Many people choose to borrow money from their regular bank as doing so often means less paperwork. However, it can be worth your time to shop around to see if other banks or financial institutions are offering lower interest rates.
The process of applying for a loan will vary on what type of loan you get. A mortgage, for example, has a much more complex application process than a personal loan. However, they have some eligibility criteria in common:
- Age of majority in your home province.
- Proof of employment.
- Minimum income.
- Minimum credit score requirement .
- Proof of address.
- Proper identification.
Applying for any type of bank loan will often result in a hard credit inquiry, which helps the lender determine your ability to pay back the loan.
How getting a bank loan impacts your credit score
Your credit score is determined by several factors that include the type of credit you have, how much credit you use, and if you make your payments on time.
When a lender performs a hard inquiry, it may cause your credit score to drop, but the effect will only be temporary. So long as you keep your credit utilization under 35% and make your payments on time, taking out a loan could actually help to build your credit score over time.
But the opposite is also true: if you take out multiple loans or lines of credit, only make the minimum payments and fail to make payments on time, the overall effect on your credit score will be negative.
» MORE: How to check your credit score
What if your bank loan is denied?
If you are denied a loan from a bank or a credit union, your first step should be to ask the underwriter what caused the denial. They may or may not share the exact reason with you.
Common reasons for denial include a low credit score, insufficient income, too much existing debt or not enough credit history. Taking steps to strengthen your credit score, increasing your income or paying down debt could give you a better chance of getting approved in the future.
However, in the meantime if you still need financing you might consider the following:
- A secured loan instead of an unsecured loan.
- Seeking out a friend or family member to co-sign the loan.
- Requesting a smaller loan amount.
- Looking for a lender that offers more relaxed qualification requirements.