We can all think of a time in our lives when some extra cash would have gone a long way in helping us in a moment of need. Maybe you didn’t have enough money saved to finance your education for the next four years. Maybe your finances were keeping your dream house just out of reach. Or maybe you were facing a small emergency expense in a moment where your bank account had run dry.
In some situations, personal loans in Canada may provide the assistance you need to help you handle what’s in front of you. Having said that, taking on debt is a big deal and it shouldn’t be taken lightly. It’s important you have an understanding of what you’re applying for and to ensure that you are able to pay back the personal loan.
Let’s go over some of the key components of personal loans, including when you might consider using one, the different types of loans and how they work, the potential benefits of online personal loans, and more.
In a broad sense, a personal loan is money borrowed from a lender by an individual that intends to use it for some kind of personal use. Because there are all sorts of loans that can fall under this umbrella, the uses for these loans can vary. For example, you could:
When it comes to the process of applying for personal loans in Canada, you can generally go two routes. You can either apply for one from a physical location, which could be at places like banks, credit unions, or independent lenders, or you can apply for personal loans online. Whether you apply for a loan online or from a physical location, you’ll need to assess your financial needs, see what’s available, and find something that suits your situation.
A secured loan is a loan that requires you to provide collateral in order to qualify for the loan. The type of collateral you’re required to provide can vary based on the type of secured loan you’re applying for and the lender you’re applying with. Because lenders can leverage collateral if payments are missed on a secured loan, the interest rates and/or fees tend to be lower than the cost of an unsecured personal loan.
With an unsecured personal loan, collateral isn’t a part of the qualification process at all. The lender providing the loan will focus on other factors that indicate to them whether you’ve been a reliable borrower in the past and whether or not you’re likely to repay the loan you’ve applied for. They may put some attention on your credit score, which is a number that’s meant to summarize your borrowing history. On top of that, they’ll look at things like your income and employment situation.
There are a lot of different types of personal loans out there which can sometimes make it tricky to figure out what’s best suited to your situation. To help you get a better sense of what’s out there, we’re going to go over some of the more common types that you might come across.
If you’re approved for a line of credit, you’ll be getting a revolving form of credit. What does this mean? Well, for starters, you’ll gain access to a certain amount of credit which you can draw funds from whenever you need money. You can generally draw as much or as little as you need on a continuous basis, as long as it doesn’t exceed your available credit. In terms of repayment, you’ll be charged interest and/or fees, but these charges will usually be based on the amount of money you’ve drawn, not the total amount of your credit limit.
Installment loans may fall more in line with what you might be picturing when you think of a typical personal loan. Unlike with revolving forms of credit, if you’re approved for an installment loan, you’ll be given a lump sum of money. There is a set loan term with a fixed number of scheduled payments to be repaid over time, which could span a few months or even a few years in some cases.
With these personal loans, because your repayment schedule and payment amounts are generally pre-determined, you can account for these payments in your budget ahead of time.
Unsecured personal lines of credit and installment loans may be used for various purposes, including for emergency expenses.
A HELOC is a type of secured loan, which means that you’ll need to provide some type of asset as collateral in order to be approved. In this situation, the collateral will take the form of the equity you have in your home.
They’re also a form of revolving credit and they can often be fairly large in scope considering how big the asset is that you’re putting up. Therefore, it’s important that you get a thorough understanding of how the specific HELOC that you are applying for works.
In a lot of cases, they can be used as a safety net when you’re taking on large projects, like some sort of home improvement, and you don’t know exactly what the final cost is going to be.
Just like HELOCs, a mortgage is also a type of secured loan. Their purpose is to help you buy property, and the asset you’d be using to secure your loan would be your equity in the property you’re trying to buy.
Unlike HELOCs, they are not a form of revolving credit, and instead are considered to be a type of installment loan. Typically, when you buy a home, you’ll need to put a large down payment to secure your purchase. This will be a percentage of the total purchase price of your home. A mortgage fills the gap between your down payment and the total purchase price, with the term usually stretching to several decades.
If our description of lines of credit sounded familiar to you, it’s probably because you tap into a very similar account on a regular basis! We’re, of course, talking about credit cards. Credit cards are also a type of revolving credit, through which you’ll get a credit limit that you can tap into on a continuous basis, as you pay down what you owe. Although you’ll also only need to pay interest and/or fees on what you’ve used, not the total amount of credit available to you, there may be other fees associated with the credit card.
With a credit card, if you have an outstanding balance, you are required to make minimum payments on your due dates to keep your account in good standing. Having said that, you should still do your best to pay off as much of your outstanding principal as you can, so you can reduce the amount of interest and/or fees that accrue.
We all know how expensive school can get. A lot of people may not have the money on hand to pay for tuition out of pocket. That’s where student loans come in. These are personal loans that are offered by different lenders for the specific purpose of paying for school expenses. The rates are generally low compared to certain other types of personal loans and can also be subsidized by the government in many cases. Often, you won’t need to start paying off your student loans until after you’ve graduated.
Like we’ve mentioned, there are a lot of reasons you may want to apply for a personal loan, and this will dictate the type of personal loan you apply for.
When we talk about short-term loans, generally, their main use is as a safety net to help you deal with unexpected expenses, like an essential home repair or an emergency car repair.
While emergency situations can vary, one thing that should be consistent across the board is that you should avoid applying for a personal loan if:
While it might be tempting to apply for a personal loan when you need a little extra cash, it’s important that you assess your situation to figure out if it’s really the best move for you in that moment.
Like we previously touched on, if you’re looking for personal loans in Canada, you may have the option of applying for one in person or online. But why would you opt for an online personal loan over one from a physical location?
For starters, if you’re facing an emergency expense, with an online personal loan, the application process can be fast. Depending on the lender you’re working with, if you’re approved, you may even be able to get your money deposited into your bank account in a single business day. Another important factor to consider is how convenient they can be. Because the application process is online, you can fill out the application from wherever is easiest for you as long as you have internet access. In a lot of cases, you can even start to fill out the application 24/7.
There are different reasons why people apply for personal loans. It’s important to identify the type of loan you’re looking for, the purpose you need the funds for, and ensure you have the ability to pay off the loan.
When we specifically refer to small personal loans online, one of the primary purposes they may serve is as a backup financial option in emergency situations. If you need a financial boost when an unexpected expense strikes and your savings won’t cover it, an online personal loan may be an option. This could be for things like emergency home repairs, an unexpected trip to the auto shop, and more.