Personal Loan Interest Rates

Interest rates in Canada often fluctuate depending on the current prime rate with the Bank of Canada. Since the federal government is trying to curb inflation, the interest rates are a bit higher than what we are normally used to seeing. When it comes to getting a personal loan, you are looking at an annual percentage rate of 9.99% or higher. This rate is determined based on a few different factors. These include your credit score as well as your debt-to-income ratio.

It is most common for banks and credit unions to have the lowest interest rates, but private lenders are stepping up to the plate. Just like with any business, their primary goal is to make money. If they give you a loan, then they will make money on that interest. Believe it or not, there are more Canadians than you think who have a high credit score of at least 700. Because private lenders are now expanding into lower interest rate loans, there is not only more opportunity for them to make money but also more choices for consumers to find a lender that works for them. While an interest-free loan would be ideal, unless you’re borrowing from friends and family, low-interest rate loans are the next best choice.

How To Qualify for a Low-Interest Loan

Whether you are applying through a bank, credit union or a private lender, the requirements to get approved for a low-interest rate loan stay virtually the same. While the exact specifications may be different, the general premise is the same. In order to even be considered with any lender, you have to be of the majority age (18 or 19, depending on your province) and a Canadian citizen or permanent resident. From there, the lender will go over the other requirements.

• A good credit score. While it is recommended to have a credit score of at least 680 to get a low-interest rate, you may be able to qualify with a 620. However, the lender will take into account more than just your credit score. What is on your credit report will make a big difference as well.
• Low debt-to-income ratio. In order to get low-interest personal loans, lenders like you need to have a debt-to-income ratio below 40%. This means that 40% or less of your monthly income goes towards your monthly payments. These include mortgage payments and minimum payments. Rent payments are calculated separately.
• Stable source of income. While it is not necessary to be employed to get a personal loan, you do have to show that you have a stable source of income. Lenders like to see around 3 months of stable income. If you have just started a new job, it usually doesn’t make a difference if you were working steadily up until you started the new position.
• Net worth. Lenders will often look at your total net worth to help them decide what you can reasonably afford. This is often why people who own their own homes can borrow money more than those who don’t.
• Low number of credit checks. Anytime you do a hard credit check, it can deduct anywhere from 5 – 15 points from your credit score. If you are looking for a loan and a lender notices there are a lot of credit checks on your report, this can be seen as a red flag. To them, this says you either have a lot of debt or other lenders are not willing to take a chance on you.
• Total monthly or yearly income. Most lenders, on top of requiring a steady income, also require you to meet a monthly income minimum. This usually ranges from $1,200 to $1,500 per month. Many lenders will automatically decline you if you fall under this minimum, even if you meet all of the other requirements.

Types of Low-Interest Loans

In Canada, there are different types of low-interest loans that you can qualify for. Which ones you apply for depends on your financial situation and your credit history (which will include any time you miss payments as well as any outstanding balances). These factors will help the lenders decide whether or not to approve your loan application. 

Unsecured Loans

Unsecured personal loans, also known as personal installment loans or cash loans, are loans that don’t involve collateral. These are the most difficult types of personal loans to get, and they come with a variety of interest rates. Depending on the lender, you’ll either get variable interest rates or fixed interest rates. 

Variable interest rates are rates that vary with the prime rate. These will fluctuate for the duration of the personal loan. Fixed interest rates are set and will remain the same for the entirety of the loan. Usually, whether you have a fixed-rate loan or variable-rate loan, your personal loan payments will stay the same. In most cases, the only thing that will change with a variable interest rate is how much of the payment will go toward interest and how much will go toward the principal. 

Secured Loans

Secured personal loans have the lowest interest rate of the different options. That said, they’re also riskier. With secured loans, a large asset is put up against the loan, and if the borrower defaults, then the lender can seize the asset. Because of this, secured loans are also one of the easiest personal loans to get. 

The most common types of secured loans are home equity loans, home equity line of credits and auto loans. However, there are also secured credit cards which have a similar interest rate to traditional credit cards, but they allow you to build your low credit score if you can’t get a traditional credit card.

Debt Consolidation Loans

Debt consolidation loans can either be an unsecured loan or a secured loan. The difference with this loan is the banks consider the debt you’re paying off when they give you loan approval. For many, consolidating debt is a good reason to get low-interest loans. They consolidate debt and make your debt payments more manageable.

Documents Required for a Personal Loan

When applying for a personal loan, lenders will ask for documentation to prove that you are able to afford the loan, as well as meet their qualifications. These documents also help them to determine the interest rate you would qualify for, if you qualify.

The first thing they would ask for is proof of employment. So this would be paystubs or a letter of employment. A letter of employment is unusually only required if you have just started a new position or your paystub doesn’t contain all of the information the lender requires. The most likely cause of this is the company’s name not being on the pay stubs.

The next thing they are going to ask for is a piece of government issued ID. Most personal loan providers will not take a health card as ID, so you will need either a drivers license, a passport, or a provincial ID card.

After your employment and ID have been verified, most lenders will also require 90 days of bank statements. This shows what goes in and out of your account every month, proving you can afford the loan payments and are less of a risk for late or missed payments. If you are applying with an online lender or alternative lender, they have a verification tool that will provide this information as well as a direct deposit slip just by signing into your online banking. Do not worry; this technology is completely secure. If you are not using this tool, then you will need to provide a direct deposit form along with the bank statements. This form allows the lender to take out your personal loan payments on the agreed-upon dates.

Another thing they will require, if your address on your ID isn’t the same as your permanent address, is proof of address documents. Some lenders may require this either way. This is usually something like a credit card bill or a utility bill. It can even be a rental agreement if it is current within 6 months or so.

Personal Loan Agreements

Once all of the documentation is given, the lender will then do a hard credit check with the credit bureaus. If you have an excellent credit score, you’re more likely to get a loan offer with a higher credit limit as well as a lower interest rate. A strong credit score also allows most lenders to present you with a more competitive offer than most personal loans.

The loan offer will include your interest payments as well as any interest-calculated loan insurance, origination fees, the monthly payment plan and the total loan amount. You should also pay attention to any prepayment penalty if you pay off the loan early in a lump sum. If the offer is an open loan, there’s no prepayment penalty, and you can pay off the loan balance at any time. This not only allows you to pay off the loan faster, it also allows you to save money.