Trying to finance a loan? Many Canadians opt for this option every second to fulfill their needs. It's one of the most common financial transactions.
Trying to finance a loan? Many Canadians opt for this option every second to fulfill their needs. It’s one of the most common financial transactions. Personal loans can be used for a number of purposes, such as:
- Paying for college expenses
- Buying a car or other vehicle
- Paying off credit card debt
- Graduating from college with outstanding student loans
- Paying overdue utility bills
- Paying emergency medical bills
You might have questions about what personal loans are and how the process works. To answer these questions, and learn more about personal loan options from our expert sources, please continue reading this article.
As you’ll see below, there are plenty of ways to get financing for whatever your needs may be.
What are personal loans?
Personal loans are small- to medium-size loans that are unsecured and have flexible repayment options. A personal loan is different from a secured loan because, with the latter, you put up property as collateral.
With unsecured loans, you don’t need to provide anything but your signature. It’s also different from credit card debt in that while credit cards provide a line of credit, personal loans tend to be more affordable and have fixed repayment schedules.
They may be used for nearly any purpose, including paying off other high-interest debts (like credit cards) or funding big expenses like buying a house or paying college tuition and fees.
How does the personal loan process work?
When you apply for a personal loan, lenders will review your application and determine if you are eligible for a loan. If your credit score is good, they’ll give you more favorable terms than a lender who has to shoulder higher interest rates to cover their risk.
In Canada, lenders generally offer two forms of personal loans: Fixed-rate and Adjustable-rate. Fixed-rate loans are repaid automatically according to an agreed-upon term. Adjustable-rate loans have different repayment caps, rates, or terms (for example, varying payments based on changes in the prime rate).
How much am I going to pay?
Personal loans can be a useful tool for people who need money to finance large projects, medical expenses, or other non-credit card expenses. Generally speaking, the interest rate of any loan is determined by how much you borrow and your credit score.
How much you’ll need to pay on your loan depends on a few factors, including:
Loan Amount – The money amount you borrow
Interest rate – the percentage of the loan amount charged to you (usually on an annual basis)
Loan Tenure – How long will it take you to pay back your loan
Here is how the interest rate is calculated – The interest rate is calculated based on the loan balance i.e. the amount of money you still owe. The more amount you owe, the higher the interest charges. The longer you take to pay off your loan, the higher your balance will remain and the more interest you’ll pay over time.
How can I reduce the interest charges of a personal loan?
The interest rate that you are charged is the percentage of your loan balance that is charged per year. This rate can be lower than your credit card interest rates because there is no yearly limit on how much you can borrow with a personal loan. It’s important to pay off the principal of your loan as soon as possible, so it doesn’t accrue any more interest charges.
In order to pay off your personal loan quickly, it helps to know which interest charges are deducted from your loan amount.
You will receive a monthly bill for your loan, which will show the total amount in the “Current Balance” on the last day of the month. This is what you pay off with your monthly payment.
How you can control the interest amount?
You can control the interest amount you pay by:
By making loan payments on time – One should not miss any loan payment as this means that the loan balance is not decreasing. In fact, most probably the loan amount you have to pay will increase because the interest of your previous payment will be added to your outstanding balance. This way you will lag behind on your payment schedule and this will cause interest to rise.
By making extra payments – If you make an extra payment over and above your scheduled payments (even $5) it will be directly added to the principal amount of your loan. By making extra payments every month, 6 months, or a year, you’ll reduce your loan balance quickly. Also, now the interest will be calculated on the new balance which indicates a reduction in interest charges.
By repaying the loan early – If you manage to repay your loan before the end of the loan term and request to close your loan account early, it will instantly reduce the interest amount you will have to pay. Interest is calculated based on the loan amount you owe, and thus, if you don’t owe anything you will not have to pay any interest.
A note of caution – some loans such as secured loans or home equity loans may charge a prepayment penalty if you pay the loan amount early. This penalty is usually the equivalent of the remaining few months’ interest fees. This is why you must ask your lending institution about any prepayment penalties and calculate the cost of repaying the loan early in comparison to paying off the loan within the loan term.
Is there anything else I should know related to a personal loan?
It’s not hard to see how a personal loan can lead to financial freedom. A well-chosen lender is willing to roll out the red carpet and grant you the cash you need, no questions asked.
Lately, in the news, we’ve seen many people struggling with huge piles of debt, sometimes in more than one category. With this in mind, it’s important that anyone considering taking out a personal loan understands all the pros and cons before going ahead.
Can you get low rates as a homeowner? Some lenders, such as Loan Center Canada, offer lower rates and great borrowing power for homeowners who secure their loans with home equity.
Do they charge any fees for borrowing? With personal loans, there are no borrowing costs associated but some lenders may charge this.
Is it a good thing to insure your loan? Some lenders may offer creditor insurance options such as creditor life insurance, job loss insurance, or disability insurance. These products can cover loan payments if situations like unexpected job loss, injury or death, etc. happens and thus keeps your family and/or your assets safe.
Most people focus on how much they will have to repay on a personal loan. There are many details that you need to consider while making a decision if this loan is right for you. Above all, we suggest finding a reliable lending institution whom you can trust and will understand your financial situation and find the option that meets your needs and budget.
If you are looking for more information on personal loans, or want to compare types of loans, visit Loan Center Canada. Get started by filling out the simple application form and collect your cash today!