Before you start on the loan process, confirm what type of loan you need. Personal loans are usually unsecured, meaning they use your credit as a gauge rather than an asset as collateral (like your house or car). If you need a larger loan or need an open line of credit, you may want to consider other financing options.
1. Decide how much money you need
The amount you borrow should be based on the expense you’re trying to cover and your income. It’s better to determine how much you can spend each month and borrow less than your maximum so you can avoid stretching yourself too thin.
Taking out a loan that’s too small can leave you with remaining financial needs, but if you take out a loan that’s too large, you’ll be stuck paying interest on a larger amount than necessary. This is why you should carefully calculate the debt you can handle and the amount of your purchase before you apply. Only borrow what you actually need and can afford.
2. Find the right type of loan
There are a wide range of personal loan types that are appropriate for different borrowers. Common types of personal loans include:
Unsecured personal loans. A loan without collateral for general personal use. This is the most common type of personal loan.
Secured personal loans. A loan backed by collateral for general personal use.
Debt consolidation loans. A loan you can use to pay off current debts and manage your debt with the new loan, for (hopefully) a better rate and easier repayments.
Personal loans are generally available for almost any legitimate purpose. Check with your lender to see if it has any restrictions on how you can use your funds.
3. Decide on the right type of lender
Banks and credit unions tend to offer a more hands-on experience with more competitive rates and terms, however the application process will usually take longer. They also require more documents and the application itself can be more complicated. Online lenders, on the other hand, tend to have fast application and funding processes – but may come with higher interest rate offers.
Consider what you value the most when deciding where to start your search: assistance or speed.
4. Check your credit score
Your credit will determine how much you qualify to borrow. The better your score, the better your chance to be approved for the loan amount you want at a competitive rate.
While not set in stone, the general credit tiers are:
Excellent credit score: 800-900
Very good credit score: 720-799
Good credit score: 650-719
Fair credit score: 600-649
Poor credit score: 300-599
Most lenders will require a good credit rating of 650 or higher and at least one year of credit before they offer you an unsecured personal loan – so check your credit score before you apply for a personal loan.
5. Check the lender’s requirements
Don’t waste time applying for a loan that you’re not eligible for. Before you consider a lender, check their eligibility requirements. Typical requirements include:
Credit Rating: Varies, but many lenders will want you to have a credit score of 650 or higher
Annual Income: Varies, but may be as low as $12,000+ annually or as high as $25,000+ annually
Credit History: You will usually need a credit history of at least one year to qualify
Over the age of 18, or the age of majority in your province or territory
Canadian citizen or permanent resident
Regular source of income
6. Compare providers and read the fine print
Don’t hesitate to shop around and compare lenders. Check interest rates, fees, loan terms and payment options before signing any documents – and always read the lender’s fine print before you fill out an application and accept the loan. Certain fees — like prepayment penalties or late fees — may not be listed until after you apply.
You should also be on the lookout for red flags that could indicate a scam. You’ll want to make sure your lender is registered in your province or territory and has plenty of business information available so you can rest assured you aren’t giving your banking details to a fake company.
7. Gather your documents and information
Having the required documents on hand can make the application process go a lot faster — the sooner you can get them in, the sooner you can get approved. Ask your lender which documents it requires before you get started. Typically it includes:
Valid government-issued ID. Lenders generally accept driver’s licenses or passports.
Proof of employment. Generally lenders ask to see your last three pay stubs or your last two T4s.
Bank statements. This shows lenders how much money you have and can act as proof-of employment if you work for yourself.
Social Insurance Number (SIN). Your lender needs your SIN to check your credit score.
Employer’s contact information. Some lenders ask for your company’s contact information — and sometimes information about your former employers.
8. Apply for pre-approval
Many lenders, including banks and credit unions, offer pre-approval. This gives you a chance to view your potential rate and loan term based on the information you submit. It also gives you an easier way to compare different lenders: You can stack multiple offers against each other to find the best option before your credit score takes a hit.
Find the lender you want to work with then go to its website and find the application for the loan. Enter how much you’d like to borrow and how long you’ll need to pay it back. Remember, the shorter the loan, the less you’ll pay in interest.
Image: Ferratum Canada
Fill out your basic information, including your contact details. As you continue, you’ll be prompted to fill out more pages detailing your personal information and financial situation.
Image: Ferratum Canada
Once everything is filled out, verify that the information is correct and hit submit. You’ll typically be notified with a decision on your loan application within a few minutes — although some lenders may take multiple days. If you’re approved, your lender will contact you to confirm your details. Most people receive their loan funds as soon as one business day after approval, however some lenders may take one or two weeks to approve the loan and disburse the funds.
What happens next?
The application process may vary slightly from lender to lender, but generally they all follow a format similar to the one above.
Receive your loan funds
Many lenders and banks require that you have a chequing account to receive your loan via direct deposit – but that’s not always the only option. Some lenders will be able to send you a cheque — if this is important to you, ask your lender how it transfers funds.
Spend your loan
In most cases, you are free to spend your loan funds on whatever you’d like, as long as it’s legitimate. However, some lenders will not allow you to use your loan funds for post secondary education. If you took out a loan for something specific, like buying a car or consolidating debt, you should spend your loan funds on that.
Make your payments on time
It’s very important to make your payments on time so you don’t end up paying extra in fees or hurting your credit. Be sure to verify how you’ll need to make repayments. Will the lender automatically withdraw the funds using a pre-authorized payment or can you pay by phone with a credit card, online through the lender’s website or by mailing a cheque? Is there an automatic payment option? These will impact which lender you choose and how you’ll pay off your debt.
3 personal loan alternatives
Borrowing isn’t always the right option. If you’re not ready to commit to a loan — or still need to build your credit — consider these three alternatives:
Savings. It might mean waiting, but saving money will be the least expensive option. By setting aside money each month in a savings account, you can earn interest rather than pay it — all while developing your budgeting skills.
Pay advance. A pay advance can be borrowed through a dedicated app or offered directly by your employer. While you’ll probably lose a small portion of your wage to an app, it might be cheaper and faster than using a personal loan.
Credit cards. It will typically have a higher APR than a personal loan, but a credit card can be a good option if you need to make a small purchase. However, check the rates before you apply: credit cards have multiple fees that can add up quickly.
Compare personal loan providers
Applying for a personal loan isn’t difficult if you’re prepared. To get the best deal, learn more about personal loans so you can find a lender that will meet your financial needs.
Frequently asked questions
There are many types of loans available. Some of the ones you can find include: student, home improvement, green, adoption, pet, vacation, wedding and car loans.
Aliyyah Camp is a writer and personal finance blogger who helps readers compare personal, student, car and business loans. Aliyyah earned a BA in communication from the University of Pennsylvania and is based in New York, where she enjoys movies and running outdoors.
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