Unsecured Loans in Canada: All You Need to Know
What You Should Know
- Unsecured loans don’t require any collateral.
- Interest rates range from 10% to 50%.
- Lenders assess your credit score, debt service ratios, and income stability.
- Term lengths range from 6 to 60 months, although can reach up to 120 months.
You're already familiar with unsecured loans if you own a credit card. They are short-term loan options that don't require collateral. Unsecured loans can be used for various reasons, such as consolidating debts, home renovations, and emergency expenses.
Unsecured loans in Canada typically come with higher interest rates than secured loans because they do not require you to secure the loan with collateral. These types of loans can range from $500 to $35,000, depending on your credit score and what the lender is willing to approve. Approval for an unsecured loan also depends on your credit score, income and debt-service ratios.
This article will cover everything you need to know about unsecured loans in Canada. The table below provides a high-level overview of the most popular unsecured loans. Note that each lender is more thoroughly discussed further in the article.
TIP: APR vs Interest Rate
Always be careful if the rate you’re shown is annual percentage rate (APR) or just a regular interest rate. The difference is that APR includes many fees not shown with the interest rate. As a result, calculating APR provides a more accurate cost of borrowing. Some lenders will display low interest rates only to include hidden and confusing fees. The rates below are displayed in APR to provide the best lender comparison.
Most Popular Unsecured Lenders
Warning: Be cautious with very high interest loans (e.g. payday loans)
High-interest loans are unsustainable for extended periods and can be expensive for long-term borrowing. If you are currently facing financial challenges, reach out to Credit Counselling Canada for complimentary financial counseling at +1 866-398-5999.
| Lender | Funding Amount | ||||
| 9.99% - 46.96% | $500 - $35,000 | 9 - 78 months | |||
| 12.99% - 39.99% | $500 - $10,000 | 9 - 60 months | |||
| 8.99% - 9.49% | N/A | 6 - 60 months | |||
| 9.65% - 12.95% | $5,000+ | 6 - 60 months | |||
| 11.14% - 15.49% | $500+ | 6 - 120 months | |||
Tip: Difference Between Unsecured and Secured Loans
The main difference between unsecured and secured loans is that secured loans require collateral in the form of an asset, such as a house or car. Unsecured loans have no collateral, meaning the lender can't seize anything in the event of default. As a result, unsecured loans are riskier to lenders and have higher interest rates along with decreased borrowing limits and shorter term lengths.
Unsecured Loan Advantages and Disadvantages
| Advantages | Disadvantages |
| No collateral required | Higher interest rate |
| Fast approval | Lower borrowing limit |
| Many options | Less approval flexibility |
Advantages
- No collateral required: This is the main advantage of unsecured loans, as they do not need any form of security or asset to back them up.
- Fast approval: Many online lenders will e-transfer you funds within 24 hours of application.
- Many options: Borrowers have the option to choose from various options in Canada.
Disadvantages
- Higher interest rate: As there is no collateral to back up the loan, lenders will usually charge a higher interest rate on unsecured loans than secured ones.
- Lower borrowing limit: Unsecured loans usually have lower borrowing limits compared to other types of financing. This means that borrowers may not be able to get the money they need for a more significant purchase.
- Less approval flexibility: Lenders will scrutinize your creditworthiness more since there is more risk for them. Your credit score, debt service ratios, and income stability become far more important.
The 3 Types of Unsecured Loans
An instalment loan provides a lump sum which you'll immediately begin making payments. Unlike a line of credit, an instalment loan doesn't allow you to withdraw and repay as necessary. For example, if you're borrowing $10,000, you will receive that amount all upfront. Additionally, you'll need to make payments on the borrowed amount.
Instalment loans often come with fixed repayment schedules and are commonly used for larger purchases like cars or home renovations. These loans may also offer lower rates than credit cards, making them an excellent option for predictable long-term financing.
A line of credit approves you for a credit account with a maximum limit. You can withdraw and repay from the account as necessary. Additionally, this option tends to have a variable rate of interest.
Unlike an instalment loan, you'll only need to pay interest on amounts withdrawn. For example, imagine you have a $10,000 limit and withdraw $2,000. In this case, you'll only need to pay for the $2,000 withdrawn. For this reason, a line of credit provides the most flexibility. They are often opened as emergency accounts since you'll only pay interest on withdrawals.
A credit card is one of the most common unsecured loan types. While technically a line of credit, credit cards have many defining characteristics, which is why it deserves a standalone category. For one, they come with much higher interest rates than instalment or line of credit loans. This makes them less desirable for larger purchases, where you may want to pay off the balance over a more extended period.
Additionally, there are more utilization constraints with credit cards than a line of credit. For example, it's more difficult to withdraw cash using a credit card. While you can use your credit card for ATM withdrawals, you'll be charged a higher cash advance rate. Meanwhile, a line of credit charges a standard rate for everything. If you plan on withdrawing cash to finance home renovations, then a line of credit is ideal.
Finally, various types of credit cards may even have lower rates than a line of credit. The following four bullets explain two types of credit cards which may interest you. We also have designated articles for each type.
- Balance Transfer: These allow you to transfer your credit balance to a new card with a temporarily low interest rate. For example, some cards have a 2.99% rate for six months. However, you can typically only transfer the balance from another credit card. The exception is MBNA, which lets you withdraw directly to your chequing account.
- Low-Interest Rate: These cards come with a low rate for the card's life. Unlike balance transfer cards, these are always low-rate cards from the beginning and usually don't require a balance transfer. Additionally, they have no fancy features as you'd see with a travel credit card.
- Instant Approval: Some credit cards in Canada can give you an answer about your application minutes. However, these cards are typically for people with good credit scores. Although, sometimes people with not-so-good credit scores can get instantly approved too.
- Bad Credit Score: Canadians with low credit ratings can take advantage of specially designed cards to rebuild their score. While these have higher interest rates and annual fees, they also report your responsible use of the card to credit bureaus.
Where to Get Unsecured Loans
| Banks | Credit Unions | Online Lenders | |
| Interest Rate | Lowest | Low | Highest |
| Creditworthiness Requirements | Highest | High | Lowest |
| Funding Speed | Slowest | Slow-fast | Fast |
| Application Process | In branch | In branch/ online | Online |
Banks
We recommend beginning with the best banks in Canada if searching for an unsecured loan. This is because they typically have the lowest interest rates, however, they are the most selective with applicants. Additionally, banks typically require a minimum loan amount of $5,000.
Another downside is that they tend to have slower funding speeds such as multiple days or weeks. As a result, they may not be the best choice for less creditworthy applicants or those needing emergency funding.
While they tend to offer lower interest rates, banks are notoriously secretive about their funding terms. This is because each loan is assessed on a case-by-case basis. While there are multiple banks in Canada, only National Bank is displayed because they could provide general information. To learn more about the other banks you will have to visit a branch or book an appointment online.
National Bank
Credit Unions
Credit unions in Canada are similar to banks but provide more lending flexibility. As a result, they are a great secondary option for those who can’t receive funding from a bank. They are similar in the sense that they still provide low interest rates.
However, they also have slower funding speeds and you may have to book an appointment with a loan officer. Another downside is that each credit union typically operates in only one province. This means that you’ll need to be a resident of the specific province to receive the credit union loan.
Coast Capital (British Columbia)
FirstOntario (Ontario)
Desjardins (Quebec & Ontario)
Online Lenders
Online lenders provide the fastest funding and you typically won’t have to meet with anyone. They are best for those who need immediate funding. They tend to have less restrictive eligibility requirements such as lower credit scores. However, online lenders generally have higher interest rates and many fees.
Borrowers who aren’t careful may succumb to predatory lending. Below you can find a list of suggested lenders. However, always ensure that you carefully read additional reviews about online lenders. Many were not included due to poor reviews on Consumer Affairs along with Better Business Bureau (BBB) complaints.
SkyCap Financial
Spring Financial
Unsecured Loan Requirements
Since unsecured loans have no collateral, lenders are extra careful in assessing applicants. Extra importance is placed on creditworthiness and the ability to pay back the loan. Lenders want to ensure that borrowers have a stable income that has the budget to make loan payments. Additionally, a proven track record of making payments is crucial to qualify for an unsecured loan. However, those who don’t meet the requirements may instead qualify for a bad credit loan.
Credit Score
| Credit Score | Estimated Interest Rate |
| Good (660+) | 9.9% to 21.5% |
| Fair (560 - 659) | 29.99% to 46.99% |
| Bad (300 - 559) | 47.00% to 400% |
The most crucial factor that lenders consider when approving unsecured loan applications is the borrower's credit score. As such, having a good credit score can significantly increase your chances of getting approved for an unsecured loan.
Generally, lenders prefer borrowers who have a credit score of at least 650 or higher. Getting approved for an unsecured loan may be difficult if you have a lower credit score. As such, it’s important to focus on improving your credit score.
Income and Expenses
In addition to the credit score, lenders will also analyse your income and expenses before approving an unsecured loan. This helps them determine whether you can repay your loan on time. Your debt-service ratios (DSRs) are essential metrics lenders use to assess your ability to repay the loan.
Your DSRs are calculated by comparing your total monthly debt obligations (such as credit card payments, auto loans and mortgage payments) with your gross monthly income. A lower DSR indicates that a borrower has enough disposable income to make monthly loan payments while staying within their budget comfortably.
(Potential) Co-signer
Having a co-signer can help increase your chances of getting approved for an unsecured loan. As with a mortgage co-signer, they agree to share responsibility for loan repayment if the primary borrower cannot repay it.
If you have poor credit or insufficient income, having a co-signer with a good credit score and financial standing can significantly increase your chances of getting approved for an unsecured loan.
However, it is essential to note that if you default on the loan payments, the co-signer will be responsible for repayment. As such, it is crucial for both parties involved to understand the risks before signing on.
The Finer Details
Unsecured loans are an excellent option for those who need access to cash but don't have any collateral to back up the loan. However, it's important to remember that these loans typically come with higher interest rates and lower borrowing limits than secured loans. This section will walk you through the finer characteristics of unsecured loans. This will help you know what to expect.
Interest Rate
Unsecured loans typically have higher interest rates than secured loans. This is because the lender has no collateral to back up the loan and, thus, carries more risk in lending money without any assurance of repayment.
However, within the category of unsecured loans, interest rates typically range from 9.00% to 45.00%. Although not included in this range, payday loans can exceed a 300% APR. It's recommended to avoid these types of loans.
More creditworthy borrowers will receive the lower end of the range. For example, you'll receive a lower interest rate if you have a high credit score, stable income, and low debt service ratios.
Fees
Fees can drastically increase your cost of borrowing, yet aren't included in your interest rate. For example, an origination fee for setting up your loan can cost 0.50% to 5.00% of the loan amount. This is why it's essential to calculate APR when comparing loans.
In addition, lenders charge various penalties and fees. While these amounts can vary by lender, the following details the most common expenses for unsecured loans and how much you should expect to pay for them:
- Non-Sufficient Funds (NSF) Fee: A $25-$50 fee your lender will charge you if you withdraw from an account without sufficient funds to manage the payment. Your bank will also charge you an NSF fee. Some lenders will provide a grace period if you contact them a few days before the payment withdrawal.
- Prepayment Penalty: Lenders may require you to pay a fee if you want to pay off your loan early. This fee can range from 0.50% - 1.00% of the loan amount and is only applicable if you have a closed loan.
- Late Payment Fee: A $15 - $35 fee lenders will charge you if your payment is late.
- Loan Renewal Fee: When you renew the loan, lenders may require you to pay a fee for extending the repayment period. This usually ranges from 0.50% - 1.00%. Depending on your loan agreement, this fee can be avoidable.
- Loan Protection Plan: This insurance costs about 2.50% monthly of the loan principal. It will cover your loan payments in the event of injury, involuntary unemployment, critical illness, or death. Some lenders offer this as an optional add-on, while some lenders require it.
Term Length
Most unsecured loans have a repayment period of 6 months to 5 years. The term length you get will depend on the amount you borrow and your creditworthiness. In general, if you are applying for a loan with a small amount, you'll likely have a shorter repayment period than someone who is borrowing a more significant amount.
Note that a longer term length will result in lower monthly payments. However, this results in more lifetime interest paid across your term. You can use a loan calculator to analyse the balance between monthly payments and interest paid.
Loan Amount
Typically unsecured loans provide $500 to $35,000 in funding. The amount you can borrow with an unsecured loan will depend on your creditworthiness and income. Generally speaking, if you have a high credit score, consistent income, and low debt-service ratios, you'll be able to borrow more money.
It's important to note that the amount you request and then receive can differ. This is because lenders consider your ability to repay the loan when deciding how much to lend you.
Processing Speed
In most cases, unsecured loans are approved within 24-48 hours but can take up to a few weeks, depending on the lender.
Compared to secured loans, where you need to present an asset as collateral, unsecured loans are much faster as no property assessment is required. There's also less paperwork involved in the application process due to the lack of collateral.
Unsecured Loan Alternatives
RRSP Withdrawal
Withdrawing money from your RRSP account without obtaining a loan is possible if you have enough funds. Unfortunately, up to 30% withholding taxes can be taken out and immediately retained by the financial institution leaving you with only 70-95% of what was initially withdrawn.
If you withdraw money from your RRSP, you must pay income taxes. You will also lose out on future compound interest earnings from that money because it will not have a chance to grow.
Home Equity Loans
Homeowners can use different mortgage products to borrow against their home equity. Home equity is the difference between your mortgage balance and home market value. You can typically borrow up to 80% of your home's value, including your existing mortgage balance.
This is known as an 80% loan to value (LTV). While home equity loans have low interest rates, they take longer to process, and you can lose your home for missing payments. Some popular alternatives for home equity loans include:
- HELOC: A line of credit secured by your home.
- Second Mortgage: An instalment loan secured by your home.
- Reverse Mortgage: If you own a home and are 55 years old or older, you can get one big payment or a few smaller payments each month. You will only need to pay this money back if and when you sell your home.
Friends and Family
Borrowing from family or friends is often a great choice as it can help you sidestep high-cost loans and fees. It may be uncomfortable initially, but having an open conversation about your financial needs will ensure everyone is on the same page. Additionally, drawing up an agreement regarding repayment terms and any applicable interest rate should also be considered for further clarity around expectations.
Disclaimer:
- Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. WOWA does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
- Financial institutions and brokerages may compensate us for connecting customers to them through payments for advertisements, clicks, and leads.
- Interest rates are sourced from financial institutions' websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards' websites and documents.