Understanding personal loans
Personal loans allow you to borrow a fixed amount of money and pay it back over a certain period. Lenders may also refer to them as long-term financing plans, instalment loans and consumer loans.
You must pay back the full amount, including interest and any applicable fees. You make regular payments, called instalments.
You may use personal loans for specific purchases such as home renovations, furniture and cars. You may also use them to consolidate other debts with higher interest rates. Most personal loans range from$100 to$50,000 with a term between 6and 60months.
Personal loans are available from lenders, such as banks and credit unions. Your lender may offer you a loan for more than what you need. Be careful not to borrow more than you’re able to afford.
Make sure that the loan meets your needs. If your lender is a federally regulated bank, they must offer and sell you products and services that are appropriate for you, based on your circ*mstances and financial needs.
They also must tell you if they’ve assessed that a product or service isn’t appropriate for you. Take the time to describe your financial situation to ensure you get the right product. Don't hesitate to ask questions and make sure you understand the personal loan you have or want.
Information you must provide to your lender
Generally, lenders require proof that you have a:
- regular income
- bank account
- permanent address
Most lenders run a credit check when you apply for a personal loan. Your credit report helps them evaluate your ability to repay a loan. They’ll likely consider your debts as well. Your credit report, credit score and debts may affect your loan options. For example, the interest rate and type of loan you qualify for.
Learn more about credit reports and scores.
Getting your loan from a lender
Lenders usually give you the money for your loan in one of the following ways:
- in cash
- deposited in your bank account
- sent to you as an electronic transfer
- sent to other lenders directly (if you’re consolidating other debts)
- on a prepaid card
There may be a cost to activate and use a prepaid card.
Understanding the terms and conditions
Before you sign a personal loan agreement, make sure you understand the terms and conditions. Ask the lender about anything you don’t understand.
Federally regulated lenders like banks must give you the following information when getting a personal loan:
- amount of the loan
- interest rate and whether it’s fixed or variable
- term of the loan
- payments amount
- other fees and service charges
- optional services you accepted
Other lenders, like some credit unions, are under provincial or territorial regulation. They may not need to provide this information. Contact your provincial or territorial Consumer Affairs office to learn more about lending rules.
Find your provincial or territorial Consumer Affairs office.
Types of personal loans
There are 2 types of personal loans, secured loans and unsecured loans.
Secured loans
A secured personal loan uses an asset, such as your car, as a collateral. It’s a promise to your lender that you’ll pay back the loan. If you’re unable to make your payments, the lender may take the asset from you.
There are various kinds of secured loans, including:
- secured personal loans
- title loans
- pawn loans
Unsecured loans
An unsecured personal loan is a loan that doesn’t require collateral. If you don’t make your payments, your lender may sue you. They also have other options, such as taking money from your account.
Learn more about when financial institutions can take money from your account.
Costs of personal loans
Borrowing money with a personal loan may cost a lot of money. Make sure to consider the interest rate, fees and term of the loan.
When you take out a personal loan, your lender gives you a quote for your regular payment amount. To get to this amount, they calculate the total cost of the loan. They divide this amount by the number of payments based on the length of the term.
The total cost of the loan includes:
- the amount of the loan
- the interest on the loan
- any other applicable fees
Comparing loan options
Make sure you understand the total cost of a loan before making a decision. Multiply the payment amount by the number of payments in your term.
For example, suppose you want to get a personal loan for$2,000. The interest rate is19.99% on a monthly payment plan. The example below shows the total cost of a loan with different terms.
This example shows that the longer you take to pay off your loan, the more expensive it’ll be.
Interest rates
The interest rate on a personal loan impacts the overall cost of the loan. By law, lenders may not charge more than 60% interest annually. This includes all fees, costs and interest that you’ll pay to get the loan.
Suppose you want to get a personal loan of $2,000 for 36 months. The example below shows the total cost of the loan with different interest rates.
This example shows that a higher interest rate may significantly increase the total cost of your personal loan.
The interest rate a lender offers you may vary depending on:
- your credit history
- the type of lender
- the type of loan (secured or unsecured)
Loan insurance
You don’t have to take loan insurance with a personal loan. Your lender may offer optional creditor loan insurance for your personal loan.
Learn more about credit or loan insurance.
Paying back your personal loan
With a personal loan, you agree to make regular payments. Most lenders will ask for your banking information to take the money directly from your account (pre-authorized debit).
Learn more about pre-authorized debits.
Some lenders will send information about your personal loan payments to the credit bureaus.
Learn how to improve your credit score.
Lenders may allow you to make extra payments to pay off your loan faster. They may also allow you to pay off your loan before the end of the term without a penalty. Some lenders may charge a fee if you pay off your loan early.
You may also be able to renegotiate the terms of your personal loan agreement with your lender. This may help you manage your budget if your financial situation changes. There may be a fee for this service.
Before you take out a personal loan, you should consider your situation and your ability to pay it back. If you’re having trouble making your payments, contact your lender.
Learn how to make a plan to manage your debt.
Overdraft protection
If you think your bank account balance won’t cover your loan payment, you may consider overdraft protection. It covers the amount of a transaction when you don’t have enough money in your bank account.
Learn more about overdraft protection.
Getting electronic alerts from your financial institution
Your financial institution may send you an electronic alert when:
- the balance of your chequing or savings account falls below a certain amount
- the credit available on your credit card or personal line of credit falls below a certain amount
These alerts may help you manage your day-to-day finances and avoid fees.
Learn more about your right to receive electronic alerts.
Filing a complaint about your personal loan
If you have a complaint related to your personal loan, contact your lender.
All federally regulated financial institutions, such as banks, must have a procedure for handling complaints in place.
Learn how to file a complaint with your financial institution.
If your lender isn’t federally regulated, contact the regulator in your province or territory.
Find your provincial or territorial regulator.
Related Links
- What to consider before borrowing money
- Getting help from a credit counsellor
- Payday loans
- Financial Goal Calculator
