Unsecured Loans Canada

An unsecured loan in Canada means that there is no collateral that you have to put up in order to get the financing. As long as you qualify, you can get a personal or business loan in cash, and pay it back over a period of time with interest. Unsecured loans in Canada are very popular and are used for a variety of purposes. For example, you may be looking to pay off unexpected bills or consolidate your credit cards. Or if you are a business owner, you may need an unsecured loan to pay for renovations, inventory or expand with a new location.

At Smarter Loans, you can pre-apply for your unsecured loan, and we will connect you to the most suitable unsecured loan provider that can process your application. You can also choose a specific provider of your choice below and click “apply now” to submit an application directly to them.

We can help connect you with the top loan providers in Canada.

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Top Unsecured Loans Canada Providers in Canada

Company
Amount
Interest Rate
Reviews
Terms
$500 - $35,000
5.9% - 39.9%
12 - 60 Months
$500 - $35,000
19.99% - 46.96%
9 - 120 Months
$500 - $20,000
19.99% - 46.8%
6 - 60 Months
$500 - $30,000
19.99% - 39.99%
6 - 120 Months
Up to $35,000
Starting at 5.15%
Varies
$1,500 - $12,500
19.99% - 34.99%
12 - 60 Months
$500 - $10,000
12.99% - 39.99%
9 - 36 Months
$500 - $10,000
19.99% - 46.99%
12 - 36 Months
$2,000 - $10,000
34.9% - 43%
12 - 60 Months
$500 - $10,000
46.93%
Open Line of Credit
$2,000 - $10,000
18.9% to 54.9%
12 - 60 Months
$1,000 - $35,000
5.6% - 25.5%
36 - 60 Months

What is an unsecured loan?

An unsecured loan is a type of debt instrument available to corporations and private individuals that enables funds to be lent out purely on the creditworthiness of the borrower. This means that the once the borrower’s credit profile is evaluated, the funds are transmitted without the borrower having to pledge property or other tangible assets as collateral. Because of this type of structure, unsecured loan terms are contingent heavily on the borrower’s credit score. A high credit score can mean favourable terms in the form of lower interest, while a lower credit score can push up the interest level as the lender seeks compensation for the extra risk involved.

 

All things equal though, it is important to note that unsecured loans will always have higher rates than secured loans. In a secured facility, the lender can recoup losses by selling the borrower’s pledged assets. However, in an unsecured loan, if the loan is not recourse to the borrower’s personal assets, there is no way for the lender to recoup the loss. For this extra level of risk that they undertake, lenders thus charge higher rates of interest.

unsecured loans

Who offers unsecured loans?

 

In most cases, when lending to private individuals, banks in Canada do not offer unsecured loans as they typically tend to have more conservative business models. Because of this parameter, most debt products offered by banks are secured such as mortgages or auto loans. Unsecured loans are therefore provided by niche banks or specialist providers who are not as highly regulated as major banks and therefore have more tolerance and capacity for incremental risk. A lot of these private lenders can be found online.

Forms of Unsecured Loans

 

The unsecured loan can come in various types, each with different features, functionalities and purposes. This is done to provide flexibility to the borrower as typically, the unsecured loan is smaller in size than its secured counterpart. The three main forms are therefore:

Revolver Loan

A credit card is the best example of an individual customer’s unsecured revolving loan. As the name suggests, the loan is taken out, paid back and can be taken out again subject to various upper limits. Besides a credit card though, a customer can also obtain an unsecured personal line of credit as well for their short-term needs.

Term Loan

A term loan is a conventional type of loan structure wherein the proceeds of the loan are provided in a lump sum at the beginning of the loan term, and the loan is then repaid at periodic intervals (usually monthly or biweekly) with principal and interest repayments. This type of loan structure is also inherent within most secured loans.

Consolidation Loans

This is a special type of unsecured loan where borrowers can pool their various outstanding debts together (such as credit card, utility bills, phone bills etc.) and pay them off using the single loan. Thereafter, the consolidation loan is then paid back like a term loan with the advantage to the borrower being that he/she can pay off this new debt at a lower rate than the outstanding debts.

How to qualify for an Unsecured Loan?

 

Because there is no tangible asset being pledged as collateral in this type of loan, borrowers generally have to exhibit higher credit scores to qualify for such loans. As such, lenders will typically look at the following before extending an unsecured loan to the borrower:

  • Credit History

    This is important to evaluate the spending and repayment patterns of the borrower in the past. If there is a strong history of successfully paying back loans and debts on time, this translates into a higher credit score for the borrower. However, even for borrowers with poor or no credit, it is possible to build and rebuild credit over time provided that there is an established pattern of repayment.

  • Proof of Income

    This is arguably just as, if not more important than the credit score. In unsecured loans, the borrower’s personal cash flows are used to repay the debts. Therefore, it is important to have a steady, predictable pipeline of income to ensure that after the borrower’s daily needs are met, he/she still has enough surplus to cover debt service payments.

  • Co-signer

    While this is not a consideration in most unsecured loans, in particular cases, the lending institution may ask for a co-signer to back the loan. In a situation where the borrower fails to repay the debt, the co-signer then has the responsibility to do so.

What Happens when the Borrower Fails to Repay?

 

Unlike secured loans, the lender does not have the option to seize the assets and sell them on the open market to recoup their losses. That does not mean that the borrower can escape scot-free though. Although the lender does not have claim to any assets of the borrower, they do have multiple options such as using a collection agency to collect the debt or having a court adjudicate the matter. In these cases, if the court ruling is granted in favour of the lender, the borrower’s earnings could be garnished i.e. a component of their monthly income would be paid directly to the lender or a lien could be placed on any assets that the borrower owns. This means that in the event of liquidation, the lender has first claim to the proceeds.

Key Advantages

 

The unsecured loan type offers a distinct set of advantages to borrowers who are looking to obtain small to medium sums of money. Some of these advantages include:

Non-Recourse: Because the unsecured loan is non-recourse to the borrower’s personal assets, the borrower is protected from having to surrender personal belongings if he/she cannot repay the loan in time. As mentioned above though, there are considerations to be made here as these belongings could possibly come into play for repayment purposes if the matter goes to court.

No Collateral: If a borrower does not have any assets to post as collateral, then unsecured loans can enable him/her to still gain access to funding.

Bankruptcy Filing: In the event of a bankruptcy, the courts could potentially discharge the unsecured loan i.e. the lenders of such loans would have to write off the amount, whereas secured loans have a significantly lower probability of being written off.

Considerations

 

Despite these advantages though, there are some drawbacks of pursuing unsecured loans as a private individual or as a business. Some of these are as listed below:

Higher Interest: Because unsecured loans come with higher levels of inherent risk, lenders charge a higher amount of interest to take that risk onto their own books. This means that over the same period of time, a borrower may end up paying more with an unsecured loan than a secured loan due to the greater interest payments.

Qualification: Unsecured loans are by no means easy to qualify for. If the business does not have a sound credit history, then lenders might potentially reject the application altogether. Similarly, the same may happen even if there isn’t sufficient credit history for lenders to make an assessment from.

Types of Unsecured Loans

 

There are a multitude of unsecured loan types in our day-to-day environment as well. Some of the cases where debt is provided without any asset backing are as follows:

  1. Student loans
  2. Credit cards
  3. Personal lines of credit
  4. Credit union loans

What are Unsecured Loans Used For?

 

These loans tend to be pretty versatile in the sense that they can be used for a range of means, as long as they are legitimate. Unlike some types of secured loans such as a mortgage or auto loan, which can be solely used to buy properties and cars respectively, unsecured loans can be used for purposes such as:

  • Consolidating Debt
  • Credit Card Debt
  • Starting a New Venture
  • Wedding, Honeymoon or Vacation Costs
  • Moving Expenses
  • Medical Expenses
  • Student Loans

Frequently Asked Questions (FAQs)


1. What documents are needed for personal unsecured loans?

While these may vary by lender, the baseline documentation required is:

  1. Government-issued ID (e.g. driver’s license)
  2. Pay stubs and/or bank statements

 

 

2. How much can be borrowed?

While there is no stipulated limit theoretically, most institutions keep unsecured loans between $5000 and $20,000 with an upper limit of $50,000. Typical repayment terms are between a year to 5 years.

 

 

3. Are there any other fees to be mindful of?

Some lenders may charge an origination fee which is the cost of processing the loan.

 

 

4. Is there a particular credit score threshold I need to meet?

Each lender sets their own thresholds according to their internally defined risk parameters. However, a “good” credit score is generally defined as being in the 700+ range on a scale of 850.

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