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Personal Loans in Canada: Everything you Need to Know

Written by Jessica Steer
Getting a personal loan is easier than ever because there are more lenders offering various forms of financing than before. There are the traditional brick and mortar banks in Canada, but there’s been an explosion of online-only banks, like Spring Financial, in the last few years and the benefits of their existence are well felt (lower interest rates, more perks, etc).
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    What is a personal loan?

    A personal loan is a fixed amount of money (installment loan) that you borrow and repay within a fixed number of months. They can be secured (where you offer up collateral) or unsecured. At Spring Financial, you can be approved to borrow money up to loan amounts of $35,000.

    A personal loan is not a line of credit, as in, it is not revolving funding. When you’re approved for a personal loan, your lender gives you the full amount all at once and then, generally, within a month, you begin repayment. You are required to make fixed payment amount each month (or more than once a month, if you set it up that way) with a fixed interest percentage for a set term until the loan is paid in full.

    What can a personal loan be used for?

    A common reason is to consolidate and merge debt and pay all of them off at once with a personal loan. Some banks put stipulations on what you can use the funds for, but many do not (they’ll still ask on the application).

    Other personal loan uses:
    1. home improvement loans and renovation loans,
    2. loans for moving expenses,
    3. vacation loans,
    4. wedding loans,
    5. medical loans,
    6. car repair loans,
    7. loans for rent,
    8. small car loans,
    9. funeral loans,
    10. or other bill payments in general.

    How to qualify for a personal loan

    To qualify for a personal loan in Canada, you’ll need:

    1. To be a Canadian resident
    2. To be 18+
    3. Have an open bank account
    4. Proof of recurring income
    5. Proof of your expenses
    6. Proof of residence (recent rent or utility bill)

    Some lenders will deny applications if you’ve been through collections, are new to credit, or a recent divorce or are even repaying student loans. At Spring, you can apply regardless!

    Pros & cons of personal loans

    The demand for personal loans is rising amongst Canadians interested in escaping the cycle of payday loans, consolidating their debt, and rebuilding their credit score. If you’re applying for a personal loan, here are some things you should keep in mind.

    Pros of personal loans

    1. Fixed term & fixed rate

    2. Personal loans have a fixed term, which means that you know when the debt has to be paid off and how much your payment is every month. Compared to credit cards, which can take decades to pay off for some people, personal loans typically take no longer than five years to repay. Your payment and interest rate on a personal loan will stay the same over the entire course of the loan period, which makes this type of debt easier to manage and plan for.

    3. Debt consolidation

    4. High interest rates are one of the biggest reasons people stay in debt for a long time. Consolidating your debt with your personal loan will help simplify your life because you’ll only be required to pay one bill instead of several. Additionally, you might be able to reduce how much total interest you pay, which means more money can be saved.

    5. Build credit

    6. Personal loans are powerful tools for building up your credit score. Payment history accounts for 35% of your credit score, so the longer you make regular payments on time the more you will see your score increase. Payday loans, on the other hand, do not help you build credit. 

    Cons of personal loans

    1. Missing a payment

    2. Personal loans provide a great opportunity for you to rebuild your credit and pay off debt, but if you don't budget correctly, you could dig yourself into an even deeper hole. Missing one of your monthly payments can have a negative effect on your credit score but missing several can be devastating. If you're thinking about getting a personal loan, make it work for you. Be prepared to make every single payment on time.

    3. Unnecessary debt

    4. It's true that a personal loan can be used for anything and it's easier to get approved than it ever was in the past. But if you don't have an urgent need the extra cash, it might not be the best solution for you. Applying for a personal loan is just one of the options to consider when trying to make the right decision for your unique financial situation. 

    5. High interest

    6. The fixed monthly payment amount on a personal loan depends on how much you’re borrowing, the interest rate, and the fixed term. Your interest rate will depend on factors like your credit score and income. Often times, personal loan rates are a lot lower than credit cards, but sometimes they can be higher. Make sure to compare rates before submitting an application. 

    The benefits of applying for a personal loan from an online lender

    The market is great for online-only lenders lenders in Canada. Perks include great interest rates, incredibly quick processing and funding times & the anonymity you may want. Not everyone likes walking into a bank to ask for money, so if this is a tough spot for you, or you just don't have time, looking at online lenders like Spring is a great alternative.

    Are there tax implications on a personal loan?

    No, the Canada Revenue Agency does not consider loan funds income, unless the original loan was forgiven.

    Do I pick a short-term or long-term repayment loan term?

    That largely depends on your ability to repay the amount & pros and cons exist for both. Repayment lengths for personal loans usually fall within 9, 12, 24, 36, 48, or 60 months. Sometimes longer repayment periods are an option, though rare.

    Shorter repayment times have very high monthly payments but then it’s over quickly and you don’t lose more money to interest.

    Longer repayment times lower your monthly loan repayment by dividing the principal amount you borrowed by even more months. Yes, you get more time to repay which may seem like a “pro”, but you’ll end up paying more in interest over the course of your repayment term, making the cost of the loan higher. If you can afford to do this, then fine. But if you can’t, consider a shorter repayment period. Even a one-year repayment variation can make a difference if you’re borrowing several thousand dollars.

    Your interest rate can be tied to your repayment period as well. You might get a lower interest rate if you finance the loan over a shorter period.

    What is a term loan?

    A personal term loan comes with an agreed upon repayment schedule and a fixed or floating interest rate. With a floating interest rate, the interest amount you pay will fluctuate month to month based on market changes. A short term loan is usually paid back in under 12 months, while a long term loan typically runs for up to 30 years.

    Secured personal loan vs. unsecured personal loan

    Secured Personal Loans are backed collateral, while Unsecured Personal Loans rely on your credit score for approval. With a secured loan you can use your car or cash savings, as collateral. Secured loans are easier to get approved if you have bad credit, but if you default on your payments, the banks can seize the asset.

    What are personal loan interest rates in Canada?

    They vary considerably. At Spring, our rates vary between 29.99%-46.96%. When it comes to the rate you’re given, it will be largely due to your credit history and the risk factor your lender gives you, which may be determined by a combination of your credit score & income-to-expense ratio.

    What fees exist on a personal loan?

    Spring offers really simple personal loans - what you see is what you get. No maintenance or application fees. That said, if payments are made late or there are insufficient funds, those fees are out of our hands.

    Are personal loans different from payday loans?

    Yes. A payday loan is an extremely short and high-interest financing option and they do not offer very large amounts of money. The maximum most lenders offer in Canada is $1500 and they usually have to be repaid within 2 weeks (an average payroll cycle). Personal loans are the opposite - more money paid over more time.

    Will bankruptcy affect my eligibility for a personal loan?

    Not with Spring! While it may affect your interest rate, we won’t automatically turn down your application just because you’ve had a bankruptcy. Everyone’s financial story is different, and we take a variety of factors into consideration.

    Do personal loans affect my credit score?

    Yes. Lenders will take a look at your credit report (soft or hard inquiry) to gather the information they need to make a lending decision. A hard inquiry may lower your credit score by a few points but if you have relatively good credit (700+), a few points won’t hurt. That said, if you don’t have a choice and have to shop around, experts say that it’s best to try and group your inquiries as tightly as possible because it will make it generally understood by lenders that you’re just shopping around for the best rate or best deal. As long as you make your payments on time, your credit rating can improve, especially if you have used the loan for Debt Consolidation.

    What is the best Personal Loan option for you?

    Spring Financial offers a variety of personal loan options, custom-tailored to you and your unique financial situation.

    Contact us today to see how we can help you!

    Here’s how Spring stacks up against other Personal Loan options:

      Spring Pay Day Loans Bank Line of Credit Home Equity Loans Credit Card
    Funds in as soon as 24 hours Yes Yes No No No
    Funds in as soon as 24 hours Yes Yes No No No
    Completely Online Yes No No No No
    Builds your credit Yes No Yes Yes Yes
    Complete From Home Yes No No No Yes
    Borrow 1-35k Yes No Yes Yes Yes
    Use the funds for whatever you want Yes Yes No No Yes
    Collateral / Security Required No No No Yes No

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