Without loans, many of us wouldn’t be able to find that home we were dreaming about or launch our own business. There come certain times when we are in urgent need of funds, but we don’t have the means.
Loans help us to set off our goals, and we can make better decisions once we have a better understanding of the types of loans.
If you want to find out what are the types of loans for Canadians, keep on reading.
What Loans Are Available in Canada?
A loan is the amount of money that you borrow from a legal financial institution or a lender to fund a particular need, and it needs to be repaid over time within a certain time frame. Depending on what you need the money for, there are different types of loans available for Canadians.
Personal loans are among the most common types of loans in Canada. They are essentially closed-end loans available in two options: secured and unsecured.
- Secured personal loans are generally easy to get because they are supported by collateral. If you fail to pay off the loan, the lending company can take a hold of your property, such as your car or home.
- Unsecured loans, on the other hand, require nothing but the borrower’s signature as an assurance of the payoff. These types of loans are way riskier, thus, harder to get. Unsecured personal loans require a good credit score, and you might be charged higher interest rates because of the high risks.
With that in mind, you want to be sure that you need the loan for something important and that you don’t have any other alternatives at the moment.
Personal loans are essentially used to finance your purchases and big expenses. They can be used for anything, such as unexpected medical expenses, home repair or construction, big life events, and saving up for college.
The terms of personal loans can usually last from 1 to 7 years, depending on the lending company’s rules or the lender’s conditions. The interest rates will highly depend on your credit score and the loan terms, but some companies offer fixed interest rates instead.
Ready to apply for a personal loan? Check out our selection of the best personal loans in Canada!
These types of bank loans are short-term loans, and you can borrow up to $1,500. The terms usually last from two weeks to one month. The repayment is done either through your next paycheck or by a direct withdrawal from your bank account.
Payday loans are among the most expensive types of loans in Canada, with an APR reaching as high as 400-500%. In turn, you’ll repay more money than the sum you borrowed.
Therefore, you must be confident enough that you can repay the loan for a short period of time. Otherwise, you might be in big financial trouble and find yourself borrowing another loan to pay off the payday loan.
But on the other hand, these types of loans are the easiest to get because they don’t require a good credit score. The lenders only matter about your current income because it’s a short-term loan, and they want to know if you’ll be able to repay it quickly enough. So it’s a great option for those with bad credit history.
Another advantage of payday loans is that you’ll be able to get them within 1-2 hours. That’s why they are excellent methods for people who need a fast financing option.
If you’re looking for loans with no credit checks, check out our guide to find the best options.
Studying can be quite expensive, especially if you want to get into a prestige college or university. You’ll most likely need help to offset the cost of your studies unless you’re financially well-supported.
Luckily, you can always get a student loan to support your financing, but you’re obligated to repay the loan after graduation. Also, remember that when you’re getting a student loan, you might need a co-signer. That’s why ensure you always read the fine print and understand the rules before getting a student loan.
In Canada, there are two types of student loans: government-sponsored and private loans.
- Government-sponsored loans are tax-deductible loans available in most Canadian provinces. There are basic criteria to be met in order to be eligible for these types of loans. You must be a Canadian resident, meet the required financial need for the student loan, and be enrolled in a designated educational institution.
- Private loans, on the other hand, are not tax deductible like Government-sponsored loans. Also, the interest rates differ greatly between private and Federal sponsored loans. With private loans, students are in charge of all the interest that adds up upon taking the loan.
The amount of the government sponsored student loan you’ll be able to get depends on your family income, tuition fee, and the province of residency.
Debt Consolidation Loans
Oftentimes, people have multiple debts that they need to pay off. That’s where debt consolidation loans come into the picture.
They are essentially personal loans that you can get to pay off multiple debts and are great for simplifying your monthly payments. Furthermore, getting one larger loan to pay off your debts reduces your total interest rates significantly. This is because instead of paying off multiple loans, you’ll be paying only one, therefore, fewer interest rates to worry about.
Paying off one loan instead of multiple can also reduce your monthly payments, which will create more room in your budget in return.
Check out our list of best consolidation loans to find the right one for your needs.
Mortgage loans are also some of the most common types of loans in Canada.
To qualify for one, lenders will want to see your credit score and report and your income to see if you’re eligible. Because these types of loans are secured and closed-end loans, be mindful of the fact that you lose your home if you fail to repay the mortgage.
Another thing to consider is if there are any repairs that need to be done in the new home, the cost of the local property taxes, and the homeowner’s insurance. This could potentially affect your rate.
Additionally, mortgages are reassessed in Canada every five years. The reassessment might set forth new changes in mortgage rates in the future. So, it’s another aspect to consider when getting a mortgage.
Home Equity Loans
Home equity loans help you to borrow money against the amount of equity in your home. These can be closed or open, secured types of loans in Canada that are usually used for any big house improvements or repairments or debt consolidation.
Open home equity loan works pretty simply since it enables you to use your equity like a credit card. Once you pay off your debt, they are considered closed. The amount you’re able to borrow depends on the bank. Most banks, however, won’t lend you more than 85% of your current equity.
The way they work is pretty simple. Let’s say your home is worth $250,000. Imagine you owe your mortgage $150,000, which translates to having $100,000 in equity. You can borrow a home equity loan to fill in the gap. The terms of these types of loans usually last 30 years.
Home equity loans are types of bank loans that use your home as collateral. So, be mindful of the possibility that if you fail to pay the full loan or the mortgage, the bank will seize your home.
These are great types of loans for people that need a lump sum of cash for a larger investment in their home.
Auto loans are types of loans in Canada that you can borrow to purchase a car. They are closed-end and secured loans that use your car as collateral. This means you risk having your car seized if you default on your payment.
Interest rates on these types of loans will depend greatly on your car’s worth, your creditworthiness, and the loan term. Unlike older cars, where interest rates are usually higher, Interest rates are typically lower for new cars because they are valued at a higher price.
Auto loans are available at your bank or credit union, but there is also the opportunity to secure financing from a dealer. Regardless, be sure to shop around for the best terms and interest rates before you sign up for a loan.
The terms typically last from 3 to 8 years, and the repayment must be done monthly. Banks or lenders will allow you to borrow typically up to 25-50% of the total worth of your car. So if you’re willing to use your vehicle as collateral and you have a bad credit score, these types of loans are ideal. You’ll be able to get the loan within 24 to 48 hours.
Find the best car loans in Canada here!
Credit Builder Loans
Did you know that you have the possibility to improve your credit score by taking a loan and holding the borrowed sum in a bank account? For this purpose, you can take out a credit builder loan. These loans help with improving your credit history, which, in return, opens up more possibilities to qualify for another type of loan in the future.
These are types of bank loans that have low interest rates because they are typically small amounts. The amount you can borrow ranges between $300 and $3,000, and the APR varies between 6% and 16%.
You can get the loan within 24 to 48 hours and need to withhold for 6 months before you can use the loan. To gain access to your loan, you must first make on-time monthly payments and pay off the full loan amount to boost your credit score. They are pretty easy loans to get in Canada.
Small Business Loans
More than often, those who are starting out a business of their own need a financial boost to achieve the desired outcome. Also, many companies may want to spread out down the line, or they simply are in a need of big improvement in the business.
Thankfully, there are many financial institutions that offer loans for such needs. Small business loans also entail funding inventory, equipment purchases, and working capital among the rest. Entrepreneurs and business owners can use loans to finance basically everything related to their business.
These types of loans in Canada can be borrowed for small-sized businesses such as restaurants, hair salons, family-owned groceries, freelancers, landscapers and etc.
All immigrants who are in the process of obtaining Canadian citizenship can get support from government-offered loans. These are types of loans that help immigrants with:
- Their travel expenses to Canada
- The cost of a permanent residence fee
- Their establishment in Canada
Immigration loans are offered through The Immigration Loans Program (ILP) to immigrants who are eligible to apply for Canadian citizenship. These are typically short-term loans used to cover small amounts.
For a bank or any other financial institution to let you borrow a loan, most of them will determine your creditworthiness based on your income, credit score, and credit history. There are, however, types of loans in Canada that do not require a good credit score. On the contrary, they are used to help boost your credit score or are simply available for those without a good credit history.
If you want to skip the part of going through traditional lending establishments, you have alternative possibilities for borrowing money. The good thing about the alternative types of loans in Canada is that they are typically much faster, more flexible, and offer higher loan amounts.
These types of loans are an especially good alternative for those with short credit records and businesses who want to avoid the restrictions of bank loans.
Businesses tend to grow over time. Consequently, business owners can find themselves lacking the funds needed to cover the extra costs. Invoice financing loans are receivable financing options that small business owners can borrow to fund against outstanding invoices.
Lenders who offer these types of loans usually check the business’s financial history to ensure that their customers are reliable. Companies can take an extended line of credit from the lander and are able to withdraw money on any occasion for a small fee.
With these types of loans, borrowers can access them quickly and use them to cover short-term expenses. However, borrowers will be charged a fee upon paying the invoice in return.
Peer-to-peer is popularly known as crowdfunding. This alternative allows individuals to borrow money without going through the standard terms and traditional loan requirements. These types of loans also come without interest rates. P2P lending platforms organize the funding between investors and borrowers.
The advantage of these types of loans is that borrowers have access to several different investors without the requirements for credit records checking.
Pros and Cons of Loans
Loans are actually beneficial for many reasons. Not only do they enable you to achieve your goal by lending the money needed to do that, but they are also available for people with bad credit history.
Of course, like with everything in life, along with the benefits,
there are always some disadvantages worth considering. But it’s up to you to decide if the positives of taking a loan will outweigh the negatives.
Advantages of taking out a loan
- Help you improve your credit score
- Some types of loans offer low interest rates
- An easily accessible tool that allows businesses to grow and expand
- Help you to become financially independent when most needed
- Loans are great for getting the needed fund for urgent events
- Help you to consolidate a debt
- Great for financing large purchases
- Helps immigrants with their settlement in Canada
Disadvantages of taking out a loan
- Many types of loans require a good credit score
- Some loans have fairly high interest rates
- Many types of loans require collateral
- Debt can pile up
- Many loans have strict eligibility criteria
Despite the risk, the fact is that many people live off of loans, and if it weren’t for them, many things would be impossible to do based solely on our savings or current income.
We hope that this article provided you with enough information to fully understand the types of loans available in Canada and choose wisely. Loans are not a one-size-fits-all, you need to do your homework before signing up for any type of loan.
As beneficial as they can be, there are also risks involved. Determine where your budget stands to know if you’ll be able to carry the financial burden of monthly payments.
There are different types of loans available in Canada. It all depends on what you need it for. You can apply for personal loans, home equity loans, auto loans, student loans, immigration loans, credit builder loans, small business loans, mortgage loans, and many more.
The easiest loans to get approved for include payday loans (which don’t require a minimum credit score), car title loans (which allow you to get approved by using your car as collateral), and credit builder loans (which have borrowers make monthly payments before gaining access to their loan).
In recent years, the need to fund multiple areas of our lives is exponentially growing. However, some types of loans seem to never decline in demand. The most common types of loans for Canadians are typically student loans, personal loans, home equity loans, and mortgages.