Hannah Logan
Beth Buczynski
Personal loans may not have the complicated qualification requirements of a mortgage or home equity line of credit, but there are still certain criteria you’ll need to meet to be approved.
If you’re considering a personal loan to meet your financing or debt consolidation needs, make sure you understand the costs, eligibility requirements and minimum credit score expectations before you apply.
Why do people get personal loans?
A personal loan allows you to borrow a lump sum of money — usually $50,000 or less — that’s paid back over an agreed-upon length of time — usually five years or less.
A personal loan must be paid back in full including any interest and other fees that may apply. This is done by making regular, timely payments, often referred to as instalments.
Personal loans can be used for a variety of reasons, such as:
- to make home renovations or repairs.
- to purchase a vehicle or make vehicle repairs.
- to purchase a big item such as a vehicle or appliance.
- to pay for a big life event, like a wedding or funeral costs.
- to consolidate other, higher-interest debts.
There are two types of personal loans, secured loans and unsecured loans.
Secured personal loans: require an asset (car, home, etc.) as collateral to ensure that you will pay back the loan as borrowed. If you are unable to pay back the loan, the collateral can be taken from you by the lender
Unsecured personal loans: No collateral is required, but you’ll likely have to proof a reliable source of income.
Where can I find a personal loan?
Personal loans can be obtained through a variety of different lenders and financial institutions. This includes traditional banks and credit unions.
You may also be able to get a personal loan from non-traditional places, like Canada Post, various online-only finance companies, private lenders, payday lenders, title loan companies, and even pawn shops.
» MORE: What to know about getting a personal loan online
What is the cost of a personal loan?
The total cost of a personal loan depends on the amount you borrow, the term you choose and the interest rate in your loan agreement. Here’s what the total cost of a $5,000 personal loan might look like with various terms and interest rates.
| 8% Fixed Interest | 20% Fixed Interest | 40% Fixed Interest | |
|---|---|---|---|
| 1 Year | $5,219.28 | $5,558.04 | $6,148.32 |
| 2 Years | $5,427.36 | $6,107.52 | $7,342.56 |
| 3 Years | $5,640.48 | $6,689.52 | $8,659.80 |
| 4 Years | $5,858.88 | $7,303.20 | $10,091.04 |
| 5 Years | $6,082.80 | $7,948.20 | $11,625.60 |
Remember, not only will you need to pay back the principal borrowed, but you will also have to pay interest on that amount. There may also be additional fees to be aware of that can add to the overall cost of your personal loan. Note that you will not be taxed on your personal loan as it is not considered to be income. The only time you will pay taxes on borrowed money is if you borrow it from your RRSP.
As a rule of thumb, never borrow more than you are sure that you can pay back and always make sure to read the fine print to understand your agreement, the interest rates, and any potential fees that you may incur throughout the duration of your loan.
What credit score is required for a personal loan?
Your credit score plays an important role when it comes to getting any loan. Not only does it help you actually get approved for the loan but it will also play a role in the interest rate you are offered. Credit scores in Canada range from 300 to 900. As with all other types of loans, the higher the credit score the better your chance of being approved for a personal loan and being charged a low interest rate.
Lower credit scores indicate risk to a lender. Individuals with low credit scores may struggle to be approved for a personal loan at traditional banks and credit unions. While alternative lenders are usually legitimate, they do tend to be associated with higher interest rates which means you’ll pay more in the long run.
Who can get a personal loan?
In order to apply for a personal loan in Canada you likely need to meet the following criteria.
- Be a Canadian resident and have proof of identity.
- Be the age of majority in your province.
- Have an active bank account.
- Have proof of recurring income.
- Have proof of your monthly debts and expenses.
- Be able to show proof of residence (utility bill or rent receipt will suffice).
Keep in mind that even if you meet these requirements you may still be refused a personal loan. Some lenders will not work with individuals who have been through collections or haven’t yet built up a strong credit score.
What is the risk of taking out a personal loan?
A personal loan can be a huge help when you don’t have a credit card or a lot of cash on hand. Personal loans have gotten many Canadians through tough times, helped them afford a necessary purchase, and even helped them build credit. However, if you aren’t careful, a personal loan can add to your financial stress instead of relieving it.
The largest risk with a personal loan is borrowing more than you can pay off in the time allotted to you by the loan agreement.
Additionally, if you get into the habit of taking out loans to pay things off, you can get caught in a debt cycle. You should only be taking out a personal loan if you have an immediate need for it and a plan to pay it back on time.
As mentioned earlier you do need to be mindful of any additional fees that might be part of your loan term agreement. Make sure that you understand the terms and if you have questions ask before you sign.
Pay back your instalments as directed and in a timely manner to avoid any additional charges that may increase your debt.
If you find yourself in a situation where you are unable to pay back your loan, contact the lender right away to come up with a solution before things get out of hand.
Frequently asked questions about getting a personal loan in Canada
Yes, students should be able to get approved for a personal loan as long as they’ve reached the age of majority and can satisfy the lender’s other qualification requirements. Even international students may be able to get a secured personal loan, if they can provide proof of collateral.
No, you will not be taxed on your personal loan as it is not considered to be income. Typically, the only time you will pay taxes on borrowed money is if you take out an RRSP loan.
About the Author
DIVE EVEN DEEPER
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.
Sandra MacGregor
Debt Consolidation Loan vs Personal Loan: How to Choose
A debt consolidation loan and personal loan have many similarities, but may differ on qualification requirements, collateral requirements, interest rate and loan limit.
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.
Clay Jarvis
RRSP Loan: Benefits and Drawbacks
An RRSP loan lets you borrow money to contribute to your RRSP. This strategy can help you lower your taxable income and potentially get a tax refund, but it isn’t right for everyone.
Barry Choi