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Personal loans in Ontario: the basics.

Whether you’re planning for a big expense — like a wedding or a renovation — or looking to consolidate existing debt, taking out a personal loan is a way to get the funds you need but don’t already have in your bank account.

A personal loan is one way to borrow money and pay it back in instalments, usually over six months to five years. The total cost of a personal loan, which typically ranges from $100 to $50,000, is the amount that was initially borrowed plus the applicable interest and any additional fees or service charges.

Here’s everything you need to know about your options, and which personal loans may not be quite as good as they seem:

Your question about Ontario personal loans, answered.

How do I get a personal loan in Ontario?

Banks used to be the primary source of personal loans, but times have changed. The alternative lending space is flourishing, giving Ontarians more financial options than ever before — many of which can be set up from the comfort of your couch. A 2018 survey conducted by Smarter Loans found that alternative lenders are rapidly gaining popularity among people looking for personal loans. According to their results, nearly 54% of survey respondents said their first application for a personal loan was via an alternative lender (between 2015 and 2018).

Here’s what you need to know about the differences between alternative and traditional lenders:

Private online lenders:

What they are: Alternative lending is a broad classifier that includes private lenders and title loan companies. However, this descriptor is typically used to refer to the numerous online portals that exist today, LowestRates.ca included.

What to expect: Depending on the lender, the application process for a personal loan can vary. Compared to banks, alternative lenders tend to be less strict with their criteria. This means if you have been denied a personal loan at a bank, it does not mean that you will be denied from an alternative lender. These lenders may also have specialized options depending on the user’s needs. In order to determine eligibility, online lenders will often require users to fill out an online application form with basic personal and financial information, which may include your credit score, to determine their options.

What you need: Lenders often ask for banking details and a mailing address, as well as information about monthly or yearly income and any existing debts in order to determine whether the lender is likely to be able to repay the loan. Some alternative lenders will also run a credit check or require a credit report, but not all. This is the type of lender that LowestRates.ca will refer you to if you use our website to compare loan rates.

Bank loans

What they are: Personal loans provided through banks or credit union.

What to expect: Banks tend and credit unions tend to have a more strict set of rules for applicants. Traditional financial institutions may have requirements for a minimum credit score, and possibly a minimum income, for borrowers to be considered for a personal loan.

What you need: In addition to basic information like a mailing address and proof of income, banks will typically require information for the institution to run a credit check. Before going into a branch or applying online, be sure to check your credit score and make sure that there are no errors in your credit report.

What types of personal loans can I get in Ontario?

The reason for taking out a loan may vary, but the types of personal loans available fall into two main categories: secured and unsecured. Which type of loan you choose will depend on with your existing assets (i.e. whether or not you have a car or property to put up as collateral), but also considering how large of a loan you need and how quickly you need the money.

Secured loans

This type of loan is a way of guaranteeing that the lender will get their money back by putting up existing assets, like a car, as collateral. What this means is that if the borrower is unable to make their payments, the lender can seize their assets in order to make up the debt. The benefit to these types of loans is that lenders are more willing to loan large amounts for a low-interest rate because the collateral provides a sort of guarantee. Translation: if you need a large sum of money, such as for a large home renovation, a secured loan may be the way to go.

Unsecured

The other type of loan is an unsecured loan, which doesn’t require any collateral. Instead, if a borrower does not make their payments, the lender can take legal action to sue them for the amount owed. Though unsecured loans tend to be for smaller purchases and have higher interest rates, the benefit is that they can be processed more quickly. The most common reasons their consumers choose unsecured loans are to buy a car, renovate their home, pay off medical bills, cover education costs or consolidate debt.

Other loan types:

Fixed-rate loans

A fixed-rate loan means that the interest rate will be calculated in advance of your loan and once approved, that rate will be locked in so it won’t change throughout the duration of the loan term. This can be beneficial if borrowers are able to secure a low interest rate.

Variable-rate loans

A variable-rate loan is a loan where the interest rate will change based on the market, also known as the “prime rate.” This is less predictable and while it can save borrowers money if the rate goes down, it can also incur significant costs if interest rates soar.

Debt consolidation loans

Whether it’s multiple credit cards or outstanding loans for a car or school, having multiple debts can mean that Canadians face the risk of paying interest on numerous bills. Instead, it can be financially beneficial—and easier to organize—to have all that debt consolidated into one location. A debt consolidation loan is a way of lowering those interest rates and means making one regular payment instead of multiple ones.

Co-signer loans

If you have bad credit or if you don’t have a substantial credit history, it can be difficult to get approved for a personal loan. In that case, a co-signer loan, also known as a guarantor loan, can help you get the money you need. Essentially, the co-signer is agreeing to pay off your debt in the event that you cannot. These types of loans consider the financial health and creditworthiness of a guarantor in order to approve your personal loan. If you do not make payments, both you and your guarantor can face high penalties and drops in your credit score.

Payday loans

These loans typically target low-income borrowers that need a last-minute solution. A payday loan is so named because the amount borrowed must be paid back by your next paycheque. They often come with astronomically high interest rates — 400% is not unheard of. These are typically only for small amounts, $1,500 or less, but come with extremely high interest rates.

When should you apply for a personal loan in Ontario?

A personal loan can help make big purchases that may feel out of reach, more attainable— particularly if you have good credit. Here are a few examples of situations where a personal loan may be an option:

Buying a car - A car is one of the biggest purchases you can make, and not everyone will have enough money in their bank account to pay upfront. A personal loan can provide Ontarians with the means to purchase a car and pay back the funds in a way that works for their financial situation.

Home renovation - Maybe it’s the bathroom, or possibly the kitchen. Regardless of what part of your home you’re looking to redo, renovating part of your home can come with a big price tag. Taking out a personal loan to cover the costs can ensure that you get the necessary adjustments and upgrades done, even if you haven’t saved enough to pay the entire bill upfront.

Consolidating debt - As previously mentioned, having numerous debts can result in racking up interest rates. Rather than paying interest in multiple different places, a personal loan can be a way to consolidate all that debt into one regular payment, which also will typically yield a lower overall interest rate.

Unexpected expenses - Whether it’s a last-minute trip or surprise medical expenses, sometimes life happens and the bill isn’t quite within our means. In these situations, a personal loan can provide the necessary emergency funds.

Planning a wedding - Weddings can add up, and between the caterers, the venue and the dress, not all couples have enough in their existing finances to cover all the costs. A personal loan can offer a solution for getting the fairytale wedding, and paying for it in affordable installments.

How are personal loans different from personal lines of credit?

Personal loans and personal lines of credit can both be used for similar big purchases, such as the ones mentioned above. However, there are some significant differences between the two options. Think of personal loans like a one-time lump sum payment, that you then have to pay back, along with interest, in regular fixed installments by a set deadline. It’s a one-and-done type of deal. Personal lines of credit are more flexible. Instead of borrowing one set amount, borrowers with a personal line of credit can borrow any amount within their established credit limit at any time and interest is charged based only on the amount used, not the total amount borrowed as with a personal loan. Both personal loans and personal lines of credit can be secured or unsecured.

How are personal loans regulated in Ontario?

Consumer Protection Ontario offers valuable information for consumers about their rights when dealing with payday loans and credit reporting agencies.

Ontario has been cracking down on payday loans since 2008 when it passed the Payday Loans Act. The Act put in place protections such as ensuring that lenders can’t be charged more than $15 for every $100 borrowed, and allowing borrowers to cancel contracts for a payday loan within two days of signing without penalties. In 2018, the province took additional steps to regulate the amount that borrowers are able to take as well as requiring lenders to offer extended timelines for borrowers who take out three loans within 63 days.

Ontario also granted cities the power to regulate payday loan stores. For instance, Toronto city council voted unanimously to stop offering new licenses to payday loan stores in the city and to require existing stores to provide city-approved credit counselling services.

What are the main advantages of a personal loan?

There are multiple different types of financing options out there, but as long as you’ve taken out a loan you know you can afford, personal loans can have some distinct advantages:

  • Provide a large sum of money upfront for big purchases.
  • Consolidate debt to minimize how much you’re paying in interest.
  • Paying off debt on a fixed schedule over a longer stretch of time.