Personal loans are available from a vast number of Canadian banks, financial institutions, and private lenders. If you think a personal loan may be the solution to your financial needs, it is important to learn as much as you can before you sign on the dotted line. Here are the five core things you should know about personal loans.
#1 – A Personal Loan Is Unsecured
Banks, private lenders, and other financial institutions do not ask for collateral in exchange for a personal loan. This means that a personal loan is unsecured. Like any other form of unsecured loan, you will usually need to have excellent credit in order to secure a very low interest rate. Having bad credit may not automatically disqualify you, particularly if you go through a private lender, but it may cause your interest rate to be quite high.
#2 – You Can Only Borrow a Fixed Amount
In most cases, you will need to pre-qualify for a personal loan. This process helps the lender determine its risk in lending to you, and with that information in mind, the lender can offer you a suitable amount of money that it believes you can comfortably repay. The better your credit and the more disposable income you have, the more you can borrow. Personal loans typically range in value from $1000 to $50,000 depending on the institution and your overall credit.
#3 – Personal Loans Have Fixed Interest Rates
You will pay the same interest rate for the entire life of a personal loan. For instance, if you borrow $7000 at 9.5% interest over a period of three years, you will pay 9.5% interest for all three years. What’s more, just as your credit score determines the amount of money you can borrow, it also determines your interest rate. The better your credit, the lower the rate and vice-versa. In very special circumstances, you may qualify for a personal loan with a variable interest rate.
#4 – The Repayment Period Is Also Fixed
Although the repayment period for a personal loan is ultimately fixed, you have options at the start. For instance, you can borrow the aforementioned $7000 for six months, one year, three years, or even longer. The longer the repayment term, the lower the monthly payments, but the more interest you will pay over time. What’s more, some lenders will reward you with lower interest rates for choosing a shorter repayment term. In some cases, you might even be penalized for repaying your loan early. Be sure to read the contract carefully before you sign.
#5 – Many Types of Lenders Offer Personal Loans
If you have a good reputation with your existing bank, this is probably the first place you should apply for your loan. Although the loan is “personal” in nature, your bank will likely want to know why you want to borrow the money. If your bank turns you down due to poor credit, you still have options. There are plenty of private lenders throughout Canada that can provide you with the funds you need, but keep in mind that your interest rate may be higher than those offered by traditional banks.
Personal loans can certainly help you out of tough financial times, but only if you use them responsibly. Make sure that you fully understand the interest rates, the repayment period, and what happens if you default before you sign your name on the contract.