Conquering the Loan Landscape: How to Get a Loan in Canada

There are many reasons to seek out a loan. Whether you have a surprise payment, a planned large purchase, or just need extra funding to get you to your next payday, a loan can be a lot of help when you need money now.

Let’s break down the loan journey to better aid you on your personal loan path.

Unveiling the Loan Universe in Canada

Working with a lender can be a simple and pleasant experience. They’re there to help you find the best financial options for your specific situation. So, always feel free to ask questions until you understand what everything means and what you are agreeing to with a loan.

What Is a Loan?

We’re going to take the mystery out of borrowing credit. First off, what’s a loan, really? Plain and simple, a loan is when a debtor borrows a particular sum of money from a creditor for a specific amount of time. The money is to be paid back at an agreed-upon time and with interest.

Exploring Loan Options

Personal loans can vary in amount of money, term length, and even qualifications. Think about some of the following factors when considering a loan:

• How much money do you need?
• For how long?
• In some cases, what is the funding for?
• Are you able to repay on time?
• What is your credit history?

Here are a few loan options that might be right for you.

Line of Credit

A Line of Credit offers flexibility while giving you the choice of when you use your funds. You apply once for the loan, and if approved, you can borrow as much or as little of the available credit as you like. And you only pay interest on the amount you borrow.

You could possibly borrow several thousand dollars with a Line of Credit. The funds are available on an ongoing basis and, depending on the lender, agreement, and usage, the loan could be open for as long as you need it to be. So, you can purchase what you need right now or save the money for a rainy day. It’s up to you! Depending on your lender, this could be a secured or unsecured loan. (We’ll talk about the difference between those two types of loans soon!)

Auto Equity Loan

An Auto Equity Loan could be an option if you own your car free and clear or have a very low lien balance on the vehicle. You’ll receive all the funding at once and then repay the loan back in scheduled installments.

The lender may be able to lend you several thousand dollars since your vehicle will serve as collateral for the loan. Collateral is when you use something of monetary value to back up your loan. This makes it a secured loan.

Payday Loan

A Payday Loan offers a smaller loan amount than a Line of Credit or Auto Equity Loan and for a much shorter period of time. Typically, you can access your funds the same day, so it can be a good option if you need your money fast. The loan is usually paid back all at once within a couple of weeks of opening the account. There is no collateral for a Payday Loan, so it’s unsecured.

Understanding Secured vs. Unsecured Loans

Above, we dabbled a bit in this topic so let’s jump right in!

Collateral – Again, this is something of value that a borrower can use to back up their loan. Examples of collateral are a house, a vehicle, or even a financial account. If something happens and unfortunately, the loan cannot be repaid, the lender can take the collateral or put a lien against it as compensation for the debt.

Equity – Tiny math lesson … Equity is the value of your collateral MINUS how much you owe on it. So, if your car is worth $7,000 and you owe $5,000, you have $2,000 worth of equity.

Secured Loan – This type of debt is secured by collateral which is something of value that backs up the loan. A borrower might get more money with a secured loan than an unsecured loan and possibly have a quicker approval path. If the borrower defaults on the loan, the lender can take the collateral or put a lien against it which is a legal claim for the property to take care of the debt. Examples of a secured loan are Home Equity Line of Credit, Mortgage, and car loan.

Unsecured Loan – There is no collateral or backup securing an unsecured loan. The approval is based on the borrower’s repayment history and creditworthiness. This type of loan tends to be higher in interest because it is more of a risk for lenders. If the borrower does not pay the loan, it may affect their credit score, credit history, and creditworthiness. A Payday Loan, student loan, and credit card are examples of unsecured loans.

Loan Considerations

Make sure you know what you are signing up for with a loan and keep these important details in mind!

• Term Length – This is the amount of time you are locked into the loan. During this time, you are expected to pay back what you borrowed plus any interest and/or fees. Depending on the loan, in most cases, lenders will allow you to pay off your loan in full without penalty, but some will add extra fees.
• Repayment Schedule – The amount you owe and your due date are figured out for you in your schedule. Be sure to make your payments on time because if they’re late or you go into default it could affect your credit score.
• Interest Rate & Fees – An interest rate is how much you’re charged to borrow money. Fees can range from late payments to optional add-ons, depending on the loan and lender. So read that fine print and ask questions.
• Requirements – Know what you need to provide to be eligible for the loan. Do you have to have collateral? Do you need a certain credit score? What will it mean if you don’t have those things?
• Lending Limits – Know your limits, and the lender’s. Keep in mind that lenders have minimum and maximum borrowing amounts. Don’t ask for more than you know you can pay back.

Gearing Up for Loan Applications

You’re getting closer to applying for your loan, but let’s check out some important aspects of the application journey.

Credit Score Check

Your credit score is a predictor of your creditworthiness. It goes hand-in-hand with your credit report which shows your payment record. Most, but not all, of the time when you apply for a loan, the lender will do a credit check. Usually, this isn’t too big of a deal but there are two types of inquiries.

• Soft Hit – This is an inquiry on your credit score and report, but it will NOT affect your score.
• Hard Hit – This is an inquiry on your credit score and report, but it WILL affect your score by a few points.

Gathering Documentation

You’ll want to get all your information ready before you apply for your loan. This is a generalized list; the specific lender that you choose may request less or more documentation than what is listed below.

• Aged 18 or older
• Government-issued ID
• Steady source of income
• Open bank account
• Working phone number
• Ownership documentation (Auto Equity Loan)
• Vehicle to be used as collateral (Auto Equity Loan)

The Loan Application Process

Now that you’ve learned about different loans and their purposes, you can pick which loan you’d like to apply for and set off on your journey!

Navigating the Application Process

Once you research your possible lenders and make your choice, you’ll need to contact them about an application. This may be done online, in-person, or by phone. You’ll submit the needed documentation and wait for their loan decision.

From Application to Loan: What to Expect After Applying

If approved, you’ll choose how you’d like your funds distributed. Depending on the lender, this could be electronically, by direct deposit to your bank account, or in cash.

Then, you will make payments according to the Terms of Repayment within your loan documents.

If you are not approved, you can inquire as to why you were denied and try to improve on those aspects for a better application in the future.

Good luck on your personal loan adventure!