Smarter Loans in Canada

Nearly two thirds of Canadians hold some form of debt, and these financial burdens can quickly become overwhelming unless you make your money work harder – and smarter. Given the prevalence of debt across the country, one way to achieve this is by choosing smarter loans. Smarter loans are loans that work with you, not against you, to help you achieve your financial and life goals without drowning you in debt.

But choosing the smartest loans for you means understanding your options, the debt landscape in Canada, and how the different factors at play can influence your choices. So let’s do that!

The Canadian Loans Market

Don’t believe us that loans can control our financial lives? Well, 73.2% of Canadians have some type of outstanding debt, and a mortgage is the most common form. 40% of Canadians have a mortgage, with the median amount owing around $200,000.

But that’s not all.

56% of Canadians have outstanding debt other than a mortgage or home equity line of credit, and the median non home-related debt amount owed is a whopping $30,000.

Data source: Government of Canada 2020

A further 26% of Canadians expect to take out a new loan in 2021.

And all of that debt equals interest, mounting debt payments and a never-ending struggle to get above water.

Source: Statistics Canada 2019

What is a Smarter Loan?

So now you know just how widespread the debt crisis is in Canada – but what can you do to protect yourself while still getting the financial help you need?

The primary way to protect yourself against bad debt is to choose your loans wisely – a.k.a. get a smarter loan. That may sound trite, but it’s a little more complicated than simply opting for the lowest interest rate you can find.

Your circumstances will inherently affect both your loan choices and what your priorities should be, and only by considering both your needs and the full context of what’s available will you be able to make a smarter loan choice, get yourself out of debt quicker, and bridge the gap towards a brighter financial future.

Data source: CMHC 2020

Why Does Getting a Smarter Loan Matter?

Over 15% of all new personal loans taken out by Canadians are for debt consolidation purposes – meaning people are taking on a new form of debt to pay off older debts with unmanageable terms. This is both inefficient and expensive, and can be avoided if loans are chosen widely from the beginning. But how much difference does choosing the right loan really make? A lot!

Just consider the difference loan type alone can make to your out-of-pocket expenses.

The chart beside compares the cost of borrowing just $300 over a two week period – not exactly a lot, or for very long. But the difference between getting this money from a line of credit, your overdraft, your credit card and a payday loan is a massive $57.19 – and that’s just on a small amount for a very short period of time!

Source: FCAC

By choosing the better option here, the borrower could save 20% on the amount they originally borrowed.

How Can I Get a Smarter Loan?

Step One: Understand the Terminology

You’ll never be able to properly compare your options and choose a smarter loan if you don’t understand the way loan companies talk about their products. You should be familiar with all of the following:

  • Applicant/borrower is you, the person hoping to get a loan.
  • Lender/provider is the company giving you the loan.
  • Loan term is the lifetime of the loan – how long you have it for. Some loans are open-ended (like a credit card) while others have a set term (like a mortgage).
  • Fees are the one-off amounts you pay for certain actions, such as applying for a loan, starting a loan, and so on.
  • Principal is the core amount of money borrowed, excluding interest.
  • Penalties are amounts you pay when you do not meet the loan terms.
  • Downpayment is the amount of money you contribute towards a purchase, on top of the loan you use to complete the purchase. A downpayment can help you secure better loan terms, and some loans require a downpayment – for example, a mortgage.
  • Interest is the amount you pay for the loan, calculated as a percentage of the amount borrowed. Interest rates can be fixed (meaning you pay the same amount of interest over the life of the loan) or variable (meaning the interest rate varies over time). The APR is the annual percentage rate.
  • Payment schedule gives details of your payments on the loan – how often you must make payments, and how much those payments are. Payments are usually principal plus interest.
  • Default is what happens when you do not make your loan payments, and are considered to have broken the loan contract.
  • Secured refers to loans that are backed by an asset or collateral, so that in the event of default the lender can seize the asset in lieu of payment.
  • Unsecured refers to loans that do not have any backing, so in the event of a default the lender is left with nothing.

Step Two: Understand the Different Types of Loan

There are literally dozens of different types of loan available to Canadians, and because they’re all meant for different purposes, you need to pick the right one for your needs. These loan types include:

Personal, General Loans

Personal, general loans are loans that are for personal use, but that can be utilized for almost any reason: one off expenses, emergency funds, to pay monthly bills, to aid with cash flow, as a money management mechanism, or to aid with a purchase. There are few restrictions on how these loans can be spent, and they can be either secured or unsecured. The majority of non home-related debt held by everyday Canadians comes in the form of personal loans like this. Popular types of personal loans include:

Personal, Purpose-Specific Loans

There also exist loans for personal use, but that are geared towards a specific need – either a purchase or a problem. Two of the most common loans in Canada (mortgages and auto loans) fall into this category. Purpose-specific loans include:

  • Appliance Loans
  • Dentist Loans
  • Wedding Loans
  • Home Improvement Loans
  • Vacation Loans
Source: Statistics Canada 2019

Get a recap of the best places to get a personal loan in 2021. Compare best personal loan rates, find trusted lenders and choose the optimal personal loan for your individual needs.

Business-Related Loans

And let’s not forget business debt – which is especially important for small business owners, who may be securing their business through personal means. Business loans have different eligibility requirements than personal loans, but can be used for just as varied reasons. Common types of business loans include:

  • Commercial Mortgages
  • Business Loans
  • Small Business Loans
  • Business Lines of Credit
  • Business Credit Cards
  • Merchant Cash Advances
  • Working Capital Loans
  • Inventory Loans
  • Equipment Loans
  • Invoice Loans
  • Vehicle Loans
Data source: Government of Canada 2020

Step Three: Understand Your Personal Position

Next, and again before you even start searching for a smarter loan, you must understand your financial position. This has a big impact on what loan you’ll be able to get. So get a good handle on:

  • Your credit score (more info on this below)
  • What your past financial history says about you (including any bankruptcies or consumer proposals)
  • Your income and whether or how you can prove your income
  • Your existing debt levels
  • Your assets and existing savings

All of the above will influence which companies will work with you. But also consider: which companies do you want to work with? This means understanding exactly what it is you need from your loan – not just what it’s for, but other factors like urgency and flexibility. So ask yourself:

  • Does this need to be a long term or a short term loan? Does it need to be open-ended?
  • Can you predict exactly how much you need to borrow?
  • What’s more important to you – expediency, or going with your current financial provider?
  • Is flexibility a necessity, or can you afford to lock yourself into a product that may have a better rate?
  • Do different repayment or accessibility options matter to you?

And finally, and perhaps most important when understanding your financial position: what can you afford? Start from your bottom line. Calculate exactly how much you can afford to pay monthly for a loan, including all fees, interest and associated costs, and use this as your benchmark for considering whether or not any individual loan product is appropriate for you.

Step Four: Consider Your Options

Now you know how loans work, how to talk to a loan company and understand their terms, what you need from a loan and what you can afford. This means you’re ready to consider your options by comparing lenders and their products. Start by ruling out anyone who won’t lend to you (because of credit or other reasons). Next, rule out any lender that doesn’t offer the type of loan you want. Then finally, compare the lenders that are left for your smartest loan choice.

Tips for Comparing Loans

  • Remember to compare like with like. A three year personal loan will have different terms from a five year personal loan, so be consistent when comparing.
  • When considering costs, include a loan company’s fees, including origination and closing fees, as a basic factor in the loan’s cost.
  • If there’s a choice between loan terms, the general rule of thumb is to get as short a term loan as you can. The less time you’re paying off the loan, the less interest you’ll pay overall. However, it’s not worth getting a shorter term loan if that means your monthly payments exceed what’s affordable. So balance the term with the monthly payment to find the right level for your budget.
  • Finally, double check your chosen company’s reputation and customer reviews. You want to be able to talk to the company and resolve issues as they arise, with as little trouble as possible, so good customer service matters.

Factors That Influence Your Loan Choices

We’ve talked above about understanding which loan companies will work with you, and which you may want to work with. Let’s dive into that a little deeper:

Loan Providers

Loan providers come in many shapes and sizes, each with their own benefits, drawbacks and rules, and which all affect whether they will cater to you and whether their loans are right for you. Broadly speaking, they fall into a few major categories:

Banks and Credit Unions

Banks and credit unions are perhaps the most obvious source of financing, and they cater to the majority of Canadians seeking a loan – especially when the loans are large and long term, as with mortgages. However banks and credit unions have stricter eligibility requirements than other types of lender. They require a minimum credit score of 600, and they have fairly long processing times – sometimes weeks. So they don’t work for those seeking bad credit loans for a quick loan.

Online Lenders

Lastly, there exist a fairly new category of lenders: online-only. These are companies who offer, service and manage all of their loan offerings via an online platform, with no brick-and-mortar locations at all. These companies have the advantage of lower overheads, and so can sometimes offer better rates or more flexible terms than more traditional lenders. However there are predatory lenders in this category, so it’s important to always check a company’s reputability before borrowing from them.

Other Financial Companies

There are literally hundreds of financial companies in Canada apart from banks and credit unions, of all sizes and in every conceivable specialty. These include general loan companies, payday lenders, credit card companies, equipment or vehicle specialists (or even dealers, who sometimes offer their own financing), merchants, and financial service providers of all kinds. They can have quite diverse loan terms, depending on the specialty (if any) and the type of borrower they cater to. Comparing these providers can be tough as they vary so much, so remember to check their loan terms, including the possibility of any hidden fees.

Source: Statistics 2019

Credit Score

Credit scores are an important part of your financial identity, and help lenders, creditors, businesses and banks assess their willingness to do business with you.

Credit scores range from 300 to 900, and are based on your financial history and current financial position.

Do you have a good record of paying your debts on time? Have you ever been bankrupt? Have you got a lot of other debts already? Do you have few debts and a solid financial record?

The lower your score, the higher a financial risk you are perceived to be. If you have a score of below 600, you may be considered a credit risk. This means it’s harder to get a loan, and that it becomes more expensive to borrow. This is true even if you have a low score but good income. Conversely, the higher your score, the easier you will find accessing financial products. The average credit score in Canada is 650.

Source: Equifax

So, what is a good credit score in Canada? Let’s dive into numbers.

Smarter Loans for a Brighter Financial Future

Choosing a smarter loan is just one aspect of ensuring your financial health, but it’s a big one. Debt payments equate to an average of nearly 10% of Canadian household income; so while shaving a few percentage points off of your monthly debt payments may not sound like much, over the course of a year it could save you thousands, as well as allow you to get out of debt faster. Always consider, before taking out any loan: is there a better way to meet this financial need? A smarter loan, or another option entirely? Don’t underestimate the importance of thinking ahead when making your next big financial decision!

Are you interested in learning more about a specific type of loan? Here you can find both personal and commercial loan information.

Frequently Asked Questions About Smarter Loans in Canada

What are some other good financial habits?

Practising good financial habits across your life is important – not just in reaching your life goals, but in securing your financial health, improving your credit score and meeting future obligations. As well as choosing smarter loans, you can:

  • Use a monthly budget
  • Use coupons and flyers to save on necessary expenses
  • Shop around for better prices
  • Wait until sales or promotions for big outlays
  • Make use of rewards cards or cashback
  • Pay all your debt payments on time to avoid penalties
  • Save on home costs by investing in insulation, more efficient appliances and so on
  • Ask your service providers (such as insurance company) about available discounts
  • Use public transit or car pool to save on transport costs
  • Take advantage of free resources, such as public pools, libraries and so on
  • Check your tax filings carefully to maximize deductions and benefits

How can I improve my credit?

There are a few steps to improving your credit score:

  1. Check your credit report for errors and rectify any mistakes
  2. Pay your bills on time
  3. Make debt payments on time
  4. Pay off credit cards and keep balances low on other revolving debt instruments
  5. Only apply for loans or credit cards as needed

It takes time to improve your credit, but if you’re diligent it can be done!

Can I get a bad credit loan?

Canadians with a credit score below 600 may struggle to get a traditional loan, but there are many companies that cater to medium or bad credit borrowers. Research these companies online to find your best options; just bear in mind that you’ll almost always need to be able to prove your employment income to get a bad credit loan, and you’ll probably have to pay higher interest.

Are payday loans legal?

Yes, payday loans are legal everywhere in Canada, though the regulations concerning them and how they work do vary by province. See here for more information.

Can I apply for a smarter loan with Smarter Loans?

Absolutely! Smarter Loans is your home for smarter loans! We work with many trusted lenders across Canada and are able to help with a variety of loan types and circumstances. And by pre-applying with us we can help you find the best loan for you.

What personal information do I need to provide to get a loan quote?

To get an accurate loan quote you will need to provide personal data such as name, date of birth and address, as well as income information. The loan company will perform a credit check themselves. When applying, you’ll need to provide some supporting documentation.

Can I apply for a loan entirely online?

Yes, absolutely; many lenders – both traditional and online-only – have web-based portals that allow you to submit all of your information and apply for a loan entirely online.
How can Smarter Loans choose the best loan for me?
The experts at Smarter Loans have experience working with people from all walks of life, and with all types of financial need, and by pre-applying for a loan with us we can take your information, assess your circumstances and needs, and use our knowledge to recommend the loan that works best for you specific position.

Can I get a loan if I’ve had a past bankruptcy?

Yes, although you may find it difficult, and it’ll be almost impossible to get a loan through your bank or credit union. Some bad credit lenders do cater to those with a past bankruptcy or consumer proposal, but you’ll have to be able to prove your income and will likely have to pay high interest.

How long does it take to get a loan?

That depends on the loan provider you go to. Some providers have same-day turnaround, while others (like banks) can take days or even weeks to process a loan application and release funds. Your urgency should be a factor in deciding which loan company is best for you.

What fees do loan companies charge?

Loan companies charge a range of fees; although not every company charges every fee, you should be aware of them all and ask about them. They include:

  • Application fee
  • Origination fee
  • Administration fees
  • Closing fees
  • Early prepayment penalties
  • Late payment penalties
  • Appraisal or legal fees (e.g. for mortgages)

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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.