Are you drowning in high-interest credit card bills? Are you dreaming of taking a tropical vacation? Are you wondering what is a personal loan, and could it provide a financial lifeline?
A personal loan allows you to borrow money from banks or private lenders, which you then repay consistently. It can offer significantly cheaper financing compared to credit cards. Read this article from BestMO to discover how to best use these lending products.
What Is a Personal Loan?
A personal loan is a lump sum of money borrowed from a lender or financial institution to be repaid, with interest, in fixed installments over a set period of time for personal use.
What are personal loans used for?
You can use the fund to:
- Consolidate higher interest debt
- Pay for home renovations
- Finance a vacation
- Pay medical bills
- Make a major purchase
- Meet other financial needs
What is the Benefit of a Personal Loan?
Here are 8 key advantages:
- Lower interest rates
Compared to other options like credit cards or payday loans, personal loans often have much lower interest rates. It helps reduce the overall cost of the loan and makes repayment easier to fit into your budget.
- Debt consolidation
You can use funds from a personal loan to pay off unpaid credit card balances, store cards, payday loans, and other debts likely charging high interest.
- Improve your credit
As long as the lender reports your payment activity, paying on time each month builds a positive payment history and improves credit scores over time. Higher credit scores open access to more affordable borrowing options in the future.
- Large and fast funding
After getting approved, funds are quickly deposited directly into your account. This allows rapid access to the cash you need for large expenses.
- Flexibility in usage
Personal loans place no restrictions on how you can spend the money. The money is yours to spend as preferred.
- No collateral required
For unsecured personal loans, you avoid having to put personal assets at risk just to get approved.
- Fixed regular payments
Monthly payments of principal plus interest remain stable over the loan term once the interest rate is set.
- Easy application
Approval times are quick as well, whether you apply online or in person on paper. Some capable lenders provide lending decisions in a few minutes or a few days.
What is the Risk of a Personal Loan?
While very useful, they have financial risks, such as becoming trapped in debt, damaging access to future credit, and even losing assets. Understanding their five downsides helps in making choices and avoiding financial pitfalls.
- Potential asset loss: Failure to meet payment obligations allows the lender to seize this asset.
- High cost of borrowing: Interest rates can climb as high as 35% APR, the legal cap in Canada since January 1, 2025. Additional fees for processing or late payments further inflate costs.
- Risk of over-borrowing: Lenders may offer more funds than needed, tempting borrowers to take on unnecessary debt.
- Long-term debt cycle: Extended repayment periods, while offering smaller monthly outlays, can trap borrowers in a prolonged debt cycle, especially with high rates. Terms can stretch up to 240 months with some providers, like easyfinancial.
- Credit score damage: Falling behind on installments can harm your credit standing. Late or missed payments signal unreliability, lowering scores and affecting future borrowing capacity.
How Many Types of Personal Loans in Canada?
There are 2 main types of personal loans in Canada:
Secured personal loans
A secured loan requires an asset like a home, car, or investments as collateral. This reduces the lender’s risk. So, you can get lower interest rates and higher loan amounts. However, defaulting on payments risks losing the collateral asset.
Secured personal loans are commonly used for large borrowing needs and include subtypes like:
- Title loans, where your car’s title is used as security
- Home equity loans, secured by the value of your property
Unsecured personal loans
Conversely, this type does not require any assets. The lender assesses the borrower’s credit score, income, employment status, and existing debts to approve the application form.
These loans are more common and accessible for smaller borrowing amounts. It means they are ideal for expenses such as debt consolidation, medical emergencies, or vacation, wedding expenses.
You can learn more about secured vs unsecured loans to find out what is more suitable for you.
How Does a Personal Loan Work?
The personal loan process involves two key steps. First, once your application is approved, the lender disburses the loan in one of these forms:
- directly into your bank account,
- as a cheque,
- via electronic transfer,
- or even on a prepaid card, etc.
If the purpose of the loan is debt consolidation, the lender may directly pay your creditors.
Then, repayments are made on a fixed schedule: weekly, bi-weekly, or monthly. Each payment includes both principal and interest. The longer the loan term, the lower your monthly payments will be. However, the higher your overall cost will be due to accumulated interest.
Lenders may report your payment activity to credit bureaus. Making payments consistently and on time improves your credit score. For example, if you borrow $10,000 at 9.99% APR over 36 months, your monthly payment would be approximately $322.
What Are the Features of Personal Loans?
There are 3 common features of personal loans that define how the loan behaves over time and impact the borrower’s budget and financial goals.
Fixed loan term and repayments
Personal loans in Canada usually range from $100 to $50,000. Terms range from 6 months to 5 years. Some lenders extend up to 10 years for larger loans or borrowers with excellent credit. For example, Spring Financial offers loans from $500 to $35,000 with repayment terms up to 60 months.
They often have fixed monthly instalments, meaning that you pay the same monthly amount. This fixed structure makes them more stable than a credit card or a line of credit, which have variable payments.
Optional interest rates
Borrowers can choose between:
- Fixed interest rates: ideal for stable budgeting.
- Variable interest rates: save or cost more over time.
Rates typically start at 6.99% for good credit scores and can go as high as 35% for bad credit. Please note that some lenders allow early repayment without penalties. So always confirm the lender’s policy on prepayments to avoid unexpected fees.
Quick process
Many lenders offer rapid approval and funding, sometimes within 24 to 48 hours of application. The next question that comes to your mind may be: “How to qualify for a personal loan?”. To qualify for most personal loans, you need:
- A stable income
- A Canadian bank account
- A permanent address
- A credit score (minimum 550 for many alternative lenders; higher for banks)
Some lenders offer creditor insurance. It can cover loan payments in cases of disability, job loss, or death. While not obligatory, this can provide peace of mind in uncertain circumstances. Preparing those files in advance will help you get the loan as soon as possible.
How to Get a Personal Loan in Canada?
Whether you need quick funds or just want to learn about “what is a personal loan,” knowing how to approach lenders and meet their criteria is key. There are four main steps when applying for personal loans in Canada.
Step 1: Evaluate your financial situation
Always start with 2 questions: Why do you need the funds?, and How much can you afford to borrow? Because over-borrowing can strain your finances, so aim for a sum that aligns with your budget.
Lenders often advise a debt-to-income ratio of 36% or lower to ensure manageability. They also prefer a credit score of at least 600. If your score is below par, consider improving it by clearing debts before applying.
Step 2: Research and compare lenders
Explore where you can get a personal loan in Canada, including:
- Traditional banks: offering loans with a low interest rate;
- Credit Unions: offering personalized service;
- Online platforms: offering speedy approvals.
Use comparison tools on online platforms to evaluate:
- Loan amounts
- Interest rates (fixed vs variable)
- Repayment terms
- Fees (origination, prepayment, NSF)
You can first investigate the Bank of Canada rate to have an overview of the interest rate when borrowing money.
Make sure that you know these 4 points before signing any contract. Do not hesitate to ask the lender or request a breakdown of charges if you do not understand any criteria.
- The total cost
- Terms and conditions
- Penalties for early repayment
- Optional products (like loan insurance)
Step 3: Gather necessary documentation
Most lenders will request:
- Government-issued ID
- Proof of income (e.g., pay stubs or tax documents)
- Bank account details
- Address information
Some may also request employment history or recent bank statements.
Step 4: Apply and get approval
Submit your application online, over the phone, or in person. If approved, review the agreement for repayment schedules, rates, and any hidden costs before signing. Funds are disbursed via direct deposit, e-transfer, or prepaid card.
Set up automatic payments or reminders to avoid missing due dates. If financial challenges arise, contact the lender to discuss options like renegotiating terms.
Best Personal Loan Lenders in Canada
Choosing the right personal loan lender in Canada impacts your financial outcome. The Canadian lending market offers various options, from traditional banks to flexible online platforms. Below are the 7 best lenders based on our suggestions.
CIBC
CIBC is one of Canada’s leading banks and offers some of the most competitive interest rates on personal loans for borrowers with strong credit. Their loans start from 4.95% + adjustment, so they are ideal for individuals with excellent financial profiles. Borrowers can choose between fixed and variable rate options and apply online or in-branch, adding flexibility.
BMO
BMO offers a broad suite of personal loan products designed to meet various financial needs. According to Ratehub, its APR ranges from 8.99% to 22.99%. You can choose between fixed-rate loans providing predictable monthly payments or variable-rate options.
Spring Financial
Spring Financial specializes in helping Canadians with fair or poor credit access personal loans. While interest rates are higher (from 9.99% to 46.96%), the quick process and minimal eligibility barriers make this lender ideal for urgent needs.
LoanConnect
LoanConnect is not a direct lender but an aggregator platform that matches borrowers with multiple offers based on one application. It saves time and increases your chances of approval, especially if your credit situation is complex. It offers interest rates from 8.99%. Pre-approval results are typically delivered within five minutes.
Fairstone
Fairstone is a well-established non-bank lender that offers both secured and unsecured loans. If you’re a homeowner with moderate-to-poor credit, a secured loan with Fairstone might offer more favourable rates than unsecured alternatives. Unsecured options are also available with rates ranging between 19.99% and 34.99%.
goPeer
goPeer is Canada’s first regulated peer-to-peer lending platform, connecting borrowers directly with individual investors. Its interest rates start at 8.99%. It’s best suited for individuals with good credit who want an alternative to traditional financial institutions and are comfortable managing online loans.
easyfinancial
This is one of the most accessible lenders for Canadians with low credit scores. They approve applications in as little as 30 minutes. While interest rates are high (starting at 29.99%), the lender has a broad reach and a strong presence across Canada.
FAQs about Personal Loans
What credit score is needed for a personal loan?
In Canada, the minimum credit score required for a personal loan depends on your lender and the type of loan. A score of 580 or above is typically required to apply for a personal loan.
General guidelines
660 and above: Considered good/ very good/ excellent credit score. You’ll likely qualify for loans from traditional financial institutions like banks and credit unions. The higher score, the more competitive interest rates.
580 to 659: This range is deemed fair. You may still get approved, but likely from alternative lenders rather than major banks. Interest rates will be higher to compensate for increased lending risk.
Below 580: Classified as poor or subprime. Your options are limited, but online lenders may still approve your application. However, rates can be significantly higher.
Which bank has the lowest interest rate on a personal loan in Canada?
CIBC consistently offer some of the lowest starting rates on personal loans among traditional banks. Depending on your creditworthiness and financial profile, they often offer around 4.95% plus an adjustment factor. These rates are highly competitive but generally reserved for borrowers with excellent credit.
Is a personal loan good or bad?
A personal loan is neither good nor bad. Instead, it depends on how you use it. It can be beneficial for consolidating high-interest debt, covering emergency expenses, or building credit if repaid on time. However, if mismanaged or used for non-essential spending, it may lead to unnecessary debt and financial strain.
Does a personal loan hurt your credit?
Yes. Defaulting or missing payments will negatively impact your score. However, making consistent, on-time payments, reducing credit card balances, and diversifying your credit mix can improve your score over time.
Is a personal loan deposited into your account?
Yes. In most cases, personal loans are deposited directly into your bank account upon approval.
The bottom line
By exploring personal loans in Canada, BestMO has detailed how it works, the types available, who qualifies, the interest rates involved, and the potential benefits and risks to help you make strategic choices, whether you are seeking to reduce your debt burden or finance a large purchase.
