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.
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.
|8.14%||$5,000+||12 - 120 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|
|12.99% - 39.99%||$500 - $10,000||9 - 60 months|
|18.99% - 46.96%||$500 - $15,000||9 - 60 months|
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.
|No collateral required||Higher interest rate|
|Fast approval||Lower borrowing limit|
|Many options||Less approval flexibility|
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.
|Banks||Credit Unions||Online Lenders|
|Application Process||In branch||In branch/ online||Online|
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.
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.
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.
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||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.
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.
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.
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.
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 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:
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.
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.
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.
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.
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:
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.