How Personal Loans Work in Canada

What a personal loan is

A personal loan is a fixed sum, advanced once, that you repay on a set schedule of payments. It is usually unsecured, which means no asset is pledged against it. The lender sets the term, the payment frequency and the number of payments, and you can generally use the money for any purpose the lender accepts.

Because nothing is pledged as security, the decision rests mainly on your income and your credit file. When you search for a personal loan Canada-wide, the results come from lenders licensed in different provinces, because lending in Canada is licensed provincially. The regulator and the rules therefore differ by province and territory, and that affects who may lend to you and where a complaint goes.

loanmoose.ca is not a lender. It does not make loans, set rates or make credit decisions. It matches your request with lenders who do, and any application is assessed by the lender under that lender's own criteria.

Who it suits

• You have steady, documentable income and one defined expense to cover — consolidating several payments into one, a move, a vehicle repair, tuition or a medical cost.
• You want a set payment and a visible end date, rather than a revolving balance you decide how to pay down each month.
• You have nothing you are willing to pledge as security, or you would rather not put an asset at risk.
• You can wait for a decision and for funds to be advanced, rather than needing money the same day.
• You have already read your credit file and know what a lender will see there.
• You want the cost of borrowing disclosed in dollars before you commit, so two offers can be compared on the same basis.

What a lender checks

Income comes first. A lender wants to see that money arrives regularly and can be shown — pay statements, bank records, tax documents or benefit statements, depending on how you are paid. Self-employed income is workable but usually takes more paperwork.

Next, existing payments. The lender builds a picture of what you already owe and what leaves your account each month, then asks whether a new payment fits on top. Where a mortgage is involved, federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44%, and qualify an uninsured mortgage at the greater of the contract rate plus 2 percentage points and 5.25% under OSFI Guideline B-20. Insured mortgages and provincially regulated lenders are not all subject to B-20. Those figures describe how mortgage lenders test affordability; a personal loan lender applies its own version of the same question.

Then your credit file. Canada has two national credit reporting bureaus, and a free copy of your credit report is available from each. Read both, because a lender may consult one or the other. Look for errors, accounts you closed but that still show as open, and anything you do not recognize. Serious items carry timelines: a consumer proposal stays on a credit report for 3 years after completion, or 6 years from filing, whichever comes first, and a first bankruptcy stays on a credit report for 6 years after discharge.

Finally, security. An unsecured personal loan has none, which is why the file carries more weight. If a lender offers a secured version instead, the asset you pledge can be taken if you default, so treat the two as different products rather than two prices for the same thing.

What it costs to carry

No rate is quoted here, because the rate depends on the lender, your file and the term, and a figure printed on a page would describe an offer that does not exist for you. What you can do is learn the components, so you can read any quote you receive.

Interest is the price of money over time. It is charged against the balance, so the term and the payment schedule decide how much of it you pay altogether. A longer term with a smaller payment usually costs more in total.

Fees sit beside interest. Depending on the lender and the province, you may see an origination or administration fee, a fee for a late payment, a fee for a returned payment, or a charge for paying the loan out early. Ask which are deducted from the amount advanced and which are added later.

Insurance is the third piece. Creditor insurance is often offered alongside a loan, is frequently optional, and should be quoted as its own line so you can see the loan's cost without it. If it is optional, you may decline it.

The headline rate is not the total cost of borrowing. The total cost is every dollar you pay — interest across the whole term, plus each fee, plus any insurance premium — measured against the amount you actually received. Two quotes at the same headline rate can cost different amounts if the terms, fees or prepayment rules differ. As an outer limit rather than a benchmark, the Criminal Code criminal rate of interest is 35% per year (s. 347). For context on where rates come from, the Bank of Canada publishes a policy interest rate, a prime rate, conventional mortgage rates and Government of Canada benchmark bond yields; these are benchmarks, not offers.

How it compares with the alternatives

Before you sign

1. Ask for the total cost of borrowing in dollars across the whole term, and compare that figure rather than the rate alone against any other quote you hold.
2. Confirm whether creditor insurance is optional, what it actually pays, and what the premium is as a separate line.
3. Read the prepayment clause: whether you may pay early, whether a penalty applies, and whether interest is rebated.
4. Read the default clause: what triggers a fee, what gets reported, and what happens to the balance if you miss a payment.
5. Confirm who is lending, that the lender is licensed for your province or territory, and where a complaint goes. Complaints about federally regulated financial institutions go to the Financial Consumer Agency of Canada; provinces license and supervise most other lenders.