What is a Personal Loan?

Date posted: Sept. 10, 2015
father with his son

A personal loan is a small to moderate amount of money that you can use to make major purchases, consolidate debt, renovate your home, take a vacation, pay tuition costs, or any other reason. Personal loans come with variable repayment terms that suit your individual needs, making them better choices than payday loans in many situations.

What Are the Requirements?

In order to get a personal loan, you will need to meet some basic requirements. Most Canadian lenders require their borrowers to:

  • Be at least 18 or 19 years of age, depending on location.
  • Be a Canadian resident.
  • Consent to a credit check (usually by providing SIN information).
  • Provide personal details about income, employment, debt, and more.
  • Have a bank account in good standing.

Why Is a Credit Check Necessary?

The providers of personal loans will check your credit in order to determine their risk in lending to you. Most of the time, they check your FICO score, which is a scaled number between 300 and 900 that reflects your responsible use of debt. The higher the number, the more likely you are to qualify. What's more, people with excellent credit qualify for outstanding interest rates – sometimes as low as 2% to 4%. If you have bad credit, you may not qualify for a personal loan through traditional lenders. However, private lenders, credit unions, and specialized lenders may still consider you.

How Does Loan Repayment Work?

After reviewing your information, the lender will present you with an agreement to review. The details of the loan, including the amount you will borrow, the amount of interest applied, any service fees, and scheduled repayment dates will appear in this agreement. You need to review the agreement very carefully since it details the repayment in very precise terms. You may repay your loan over six, 12, 24, 36, or more months with a schedule list of payment dates provided. It is your responsibility to make each of your payments on time.

What Happens if You Miss a Payment?

If you cannot make a scheduled payment on time, refer to your loan agreement. Some lenders provide what is called a "grace period", or a number of days during which no late fees apply and the lender will not report the delinquency to a credit-reporting agency. In most cases, this grace period is anywhere from three to 10 days in length. If you do not make the payment within the grace period, your lender has a right to charge you late fees and report your delinquency to credit bureaus, potentially damaging your credit score.

Using Personal Loans Wisely

Like any other credit line, it is important to use personal loans wisely. For instance, if you have a good to excellent credit rating, your lender may offer you a sum of money that is more than you need. Never borrow more than you need or more than you can afford to repay. Also, be sure to consider the amount of the payments and the length of the loan term.

Personal loans are fantastic for getting the money you need to make larger purchases or consolidate your debts. However, it is sometimes better to save money for the things you want. In this case, instead of paying interest to a borrower, the bank will actually pay you interest as you save.

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