Are Personal Loans Available in Canada?

Borrowers in Canada can take advantage of several personal loan options to fit their needs. If you meet the lender requirements, you can choose from secured or unsecured personal loans to use for a variety of purposes.

Learn more about the availability of personal loans in Canada.

How Personal Loans Work in Canada

Personal loans in Canada provide you with a lump sum of money, which you pay back in installments over a set period of time along with interest. Interest rates may be fixed, meaning they stay the same for the life of the loan, or variable, meaning they change periodically during the loan term.

Like most personal loans, personal loans in Canada have loan terms that typically range from a few months to several years, and their amounts range from about $100 to $50,000.

Personal loans can be used for a variety of purposes, such as buying a car, paying for a wedding, covering emergency expenses, or consolidating credit card debt. 

Personal Loan Options in Canada

The two main types of personal loans are secured, which require collateral, and unsecured, which does not require collateral.

Secured Loans 

A secured loan requires collateral, which is an asset like your car or home that the lender can seize to offset losses if you fail to make payments. This essentially lowers the lending risk. Common types of secured loans include:

• Secured personal loan
• Title loan (the borrower uses a car loan title as collateral)
• Pawn loan (the borrower pawns an asset, such as jewelry, as collateral)
  

Unsecured Loans 

Unsecured loans do not require collateral to guarantee the loan. If you default on an unsecured loan, the lender can enter into collection proceedings, including filing a lawsuit against you. However, they cannot seize your assets.

Another option that lenders can use to collect on a defaulted unsecured loan is right of offset. Typically included in the loan agreement, right of offset allows the lender to take money from other accounts you hold with them, such as checking or savings accounts. They also can take funds from accounts you have with the lender’s affiliates. This applies to accounts in your name as well as joint accounts you share with others.

Using right of offset, lenders can take funds without notifying you or getting your permission. They also may take all the funds in your account, which could result in non-sufficient funds fees for checks or other attempted debits. 

How to Find Personal Loans 

Personal loans are available from financial institutions like banks and credit unions. You can also get certain types of personal loans in Canada from nontraditional lenders, such as title loan companies, pawnshops, payday lenders, and private lenders.

Applying for a Personal Loan in Canada

When applying for a personal loan in Canada, you can start by shopping for the best loan by comparing rates. Here are more key steps.

Shop Around for Best Loan Terms

Compare loan offers from several lenders. The key factors to compare include the interest rate, the loan terms, and fees. Keep in mind that the shorter the loan term, the less you will pay in interest. Also, ask for an itemized list of fees so you understand the charges.

Provide Personal Information 

Once you choose a lender, you will need to provide basic information, including your income and permanent address. You also will need a bank account and will need to show a government-issued identification, along with any other documents that the lender requires.

Wait for Approval

When you apply for a personal loan, the lender will likely run a credit check to learn about your risk as a borrower. The lender will review your credit report, which is a summary of your credit history, and check your credit score. Your credit score is a three-digit number that reflects your ability to manage money. The two main credit bureaus in Canada that provide your credit score are Equifax and TransUnion.

Credit scores are used to determine if a lender will approve your loan as well as what interest rate is charged on the loan. Typically, the better your credit score is, the lower the interest rate will be on the loan.

Review the Loan Papers

If you are approved for a personal loan, review all paperwork on the loan to make sure you agree to the terms. Do not sign the loan contract if the terms are not acceptable.

Loan terms to review include:

• Total loan amount
• Interest rate (fixed or variable)
• Length of loan
• All fees and service charges
• Optional services you agreed to have 
  

Ensure there are no unexpected charges, such as for optional loan insurance. By Canadian law, federally regulated banks cannot charge for optional loan insurance unless you explicitly agree.

Get Your Money 

Next, you will receive the loan funds, which can be provided in one of several ways:

• Cash
• Deposited in your bank account
• Sent through an electronic funds transfer
• Sent directly to named lenders, such as to pay off another loan or to consolidate credit card debt
• Prepaid card (could incur fees to activate and/or use)

Alternatives to a Personal Loan

If you don’t qualify for a personal loan or prefer a different method of financing, you can turn to other potential funding options like personal lines of credit, credit cards, or borrowing from others.

Personal Line of Credit 

A personal line of credit shares similarities with a personal loan, but it has key differences. While a personal loan has a fixed loan amount, a personal line of credit allows you to borrow the amount of money you need, which could be less than the amount you are approved to borrow. When you repay what you have borrowed on a line of credit, that credit becomes available to you again.

You only pay interest on the amount you borrow with a line of credit, not on the entire amount you are approved to borrow. Like a personal loan, you are required to make minimum payments toward the balance. You also can pay off the entire balance anytime.

Credit Cards

If you have credit available on your credit cards, you can charge purchases to them. However, interest rates on credit cards are typically significantly higher than those on personal loans, so you will likely pay much more in interest if you don’t pay off the balances each month.

Borrow from Family or Friends 

When borrowing from family or friends, you likely won’t have to pay interest or associated fees, and you may not have an exact repayment date. You also may not even have to make payments. However, if you don’t repay the loan in a timely manner, it could create a tense situation with loved ones.

If you do borrow from family or friends, consider putting the loan terms in writing, including a date for paying off the balance.

The Bottom Line

For qualified borrowers, there are several personal loan options in Canada. These include both secured and unsecured loans, which can be used for many different purposes.

Weigh the pros and cons of personal loans as they relate to your situation before you use one to finance your expenses.