Personal loans have become almost indispensable to the Canadian lifestyle, with the average household now carrying roughly $1.78 in debt for every dollar they earn.

People use them to subsidize business start-up expenses, finance home improvements, consolidate debts, manage emergencies and more. 

Because personal loans tend to be for lower sums than major commitments like mortgages, borrowers sometimes neglect to shop around as much as they should – and wind up with an unfavourable interest rate as a result.

We’ve prepared this guide to answer the most common questions we hear about personal loans. Alongside our lender comparison charts, after reading this you should have all you need to get started with your application!

Applying for a Personal Loan in Six Steps

1. Check your credit score

2. Compare estimated rates

3. Pre-apply for a loan (optional)

4. Compare your offers with other credit options

5. Read the fine print

6. Receive your final approval

Step 1: Check your credit score

Your credit score is a summary of your financial history. If you’ve reliably paid your bills each month; been sensible with your credit card and other loans; and have a steady income, chances are you have strong credit. If your past has been more of a mixed bag, your score may be lower.

Your credit score impacts how trustworthy you appear to prospective lenders. Those with lower scores are seen to be higher risk, and lenders will accordingly charge a higher interest rate for their trouble. Having bad credit can narrow your selection of loan providers, but there are still options – so don’t settle.

Credit scores are calculated by two reporting agencies: Equifax and TransUnion. Your score will vary slightly between the two, but both rate your credit on a scale of 300 to 900. You can request a free print copy of your report from either agency by mail or fax:

You can request a free print copy of your report from either agency by mail or fax:

• Equifax form (.pdf)

• TransUnion form (.pdf)

(There are also third-party sites that can provide free online credit checks. Some are legitimate, but be careful whom you give your personal information to!)

Step 2: Compare estimated rates

Smarter Loans’ lender comparison charts provide a selection of the top Canadian personal loan firms. You may find them helpful as you assess their key features to make an informed decision.

You’ll note that most lenders on the chart (and indeed, most lender websites) provide a range of interest rates. That’s because they are to be considered estimates. Your actual rate will be unique to you, and varies based on the aforementioned factors (credit rating, loan amount, repayment schedule, etc.).

Many providers offer loan repayment calculators to help you determine how much interest you’ll pay over the course of your loan. If they don’t, take some time to crunch the numbers yourself so you know what you’re getting into.

Step 3: Pre-Apply for a loan (optional)

We strongly recommend browsing the websites listed on our comparison charts to learn more about each lender. It’s important to examine the fine print on your own (we’ll return to this later).

Fill out some basic information about yourself and the type of loan you’re looking for and we’ll match you with the lenders we believe will be the best fit. This will also expedite your application process by providing prospective lenders enough information to tailor their pitch to you.

You’re also, of course, under no obligation to choose any of the companies that approach you if none are a perfect fit!

Step 4: Compare your offers with other credit options

Once you have selected the companies that interest you (or received your offers via our pre-application form), it’s time to narrow the field down to one. If you have any questions that you don’t feel have been covered by the FAQs and other information on the lender’s website, get in touch with them directly to ask your questions.

This is also a good time to review alternatives to a personal loan, such as:

Even a relatively minor personal loan is a serious responsibility – as is the case any time you borrow money. Make sure it’s right for you! (Later on in this guide we’ll have some additional thoughts on how to determine if this kind of loan is a good fit for your situation.)

If you’re ready to apply online, assemble the information the lender requests and follow their instructions. Before you go all the way though, check out the next step!

Step 5: Read the fine print

This step’s pretty self-explanatory!

We select lenders who’ve worked hard to make their processes as transparent as possible, but there are always legal technicalities to consider. Make sure you know the answers to the following questions before you finalize your application:

• How much will you be paying each month, including interest?

• How much will you be paying back in total over the life of your loan?

• Is your interest rate fixed over the course of your loan, or can it fluctuate?

• Are there any initial administrative fees to consider?

• What are the consequences of missing a payment?

Once you’re clear on everything, go ahead and submit your application.

Step 6: Receive your final approval

Most online personal loan lenders will provide an extremely quick turnaround on your application. 

Feel free to start using your personal loan immediately, but remember: your repayment obligations usually come into force within 30 days. Be ready to make your first payment when your due date arrives, as missing deadlines can harm your credit and reduce your likelihood of receiving future loans.

Is a personal loan right for me?

Okay, so we’ve covered in a fair amount of detail the process by which one can apply for a personal loan. Now let’s look at some of the reasons why you might want to do so.

A personal loan is typically unsecured.

What we mean is that, unlike a mortgage for example, you are not required to put up an asset as collateral. A personal loan is therefore a popular choice for people who either lack significant collateral, or who have already maximized the collateral available to them.

The downside here is that interest rates for unsecured loans tend to be a lot higher.

For example, as of early 2020, mortgage lender Meridian offers an interest rate starting at 2.9% – much lower than most personal loan companies can offer.

Personal loans also tend to be for lower sums, with smaller lenders capping out between $10,000 and $35,000, whereas mortgages often start at $50,000.

A personal loan can help you consolidate your debt.

If you have a number of debts that you’re trying to balance, consider consolidating. By taking out a new loan and paying off your previous debts, you can simplify your monthly payments and lock yourself in to a single interest rate. This makes it much less likely you’ll forget to make a payment, and can get you out of an unfavourable agreement you may’ve signed in the past.

Just make sure your new loan offers a better interest rate than the debts you’re trying to consolidate!

A personal loan can help rebuild your credit.

If your credit history precludes you from getting a major loan from your bank, taking out a small personal loan and diligently repaying it each month can help you rebuild your reputation.

Fixing your credit is a slow process, but it can be hastened by demonstrating your ability to manage a new commitment. Once you’ve paid the loan off, you should see a healthy bump in your overall rating.

A personal loan can help you deal with emergencies, or finance a new project.

What do you need financing for? Here are a few common examples of how Canadians use their personal loans:

Business Expenses

If you’re an entrepreneur looking to start your own business, you’ll likely have to make some investments upfront. These can include renting out office space, buying equipment or developing marketing materials. A short-term business loan can help get things up and running.

Education

If you’re ineligible to take out a government student loan, a personal loan can fill in the gap. It may be enough to cover the cost of a short-term program outright, or allow you to work through the first year of a degree before earning scholarships or bursaries to continue your studies.

Employment Expenses

If you find yourself seeking a new job, having cash to pay for your car and cell phone can relieve a lot of pressure. Without these assets, it can be difficult to apply for positions and attend interviews. Once you’ve been hired, you may be able to pay off the bulk of your remaining loan in lump sum and clear your debt.

Emergencies

While primary healthcare in Canada is publicly subsidized, unexpected prescriptions, dental and optical procedures and more can leave you dealing with a hefty bill – at a time when you’re not in a good place to pay it off. A personal loan can allay this stress, and let you stay focused on getting back on your feet.

As a general rule, we don’t recommend people take out a loan for spurious reasons. There are significant costs involved, and there is always the risk of damaging your credit if you’re unable to make good on your debt. But if a lack of cash is the primary thing holding you back from pursuing a dream, bettering your quality of life, or staying healthy, then personal loans can make a huge difference.

We hope this guide has answered some of your questions about personal loans, and we invite you to check out other articles by Smarter Loans experts. Best of luck with your application!