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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.
An unsecured loan is a type of debt instrument available to businesses 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 (for example, their home or vehicle). 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 rates as lenders seek compensation for the extra risk involved.
All things equal though, it is important to note that unsecured loans will almost 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 repaid, 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 in Canada can be obtained from a variety of lenders, including big banks and digital, FinTech lenders and private lenders. Many unsecured loan providers can be found online. However it is important to do your due diligence and ensure that you are dealing with a reputable provider and avoid any surprises when it comes to fees and interest rates.
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:
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.
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.
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.
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, steady income from employment and past debt repayment habits. In some cases, a co-signer can help getting approved for an unsecured loan.
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 however. 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.
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.
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.
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: student loans, credit cards, personal lines of credit, personal installment loans, and working capital loans for small business.
These loans tend to be pretty versatile in the sense that they can be used for a range of purposes. 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, medical expenses, car repairs, starting a new venture or investing into a business, wedding or vacation, big ticket purchases and much more.
While these may vary by lender, the baseline documentation required is: Government-issued ID (e.g. driver’s license), pay stubs and/or bank statements, proof of age, proof of residency.
While there is no stipulated limit theoretically, most institutions keep unsecured loans between $1,000 and $20,000 with an upper limit of $50,000. Typical repayment terms are between 6 months to 5 years.
Aside from the interest rate, some lenders may charge an origination fee which is the cost of processing the loan. You should also ask if there are fees for NSF (insufficient funds) transactions as well as early repayment penalties.
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. Typically even a fair score of 600+ would have a good chance of getting approved for an unsecured loan, considering other qualification requirements are all met.
Yes, you can qualify for unsecured personal loans in Canada with bad credit. However, you will have to resort to unsecured bad credit loans. So, you will have to pay higher interest rates for the unsecured loans available to you. Beyond that, the only issue is you will have fewer unsecured personal loan options to choose from. However, you can still qualify for fast unsecured loans.
Unsecured bad credit lenders can be found online. If you are unable to qualify for an unsecured loan due to credit rating, you could try a secured loan, such as a home equity loan or a car title loan.
An unsecured personal loan is a loan that doesn’t require any collateral. So, unsecured personal loans are less risky for you because you don’t need to risk your personal assets.
While unsecured personal loans are less risky for you, your lender will see unsecured loans as riskier. Because they are dealing with more risk, lenders will charge higher rates for unsecured loans. They will also usually have higher credit score and income requirements for you to qualify for.
Secured personal loans are loans that require you to provide collateral. So, you must use a valuable asset, such as your home or vehicle, against the loan you are applying for. In this case, your lender will have something to fall back on if you fail to pay back the loan. Because it is less risky for the lender, they will charge you lower interest rates for a secured personal loan.
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