Personal Loans – What to Know Before You Apply

When comparing personal loans, there are more than a few things to watch for to ensure you are getting the right offer. While terms and interest rates are probably at the top of the list there are still several other things to be on the lookout for as well.

Not all Canadian lenders are the same, and many of them have their own way of doing things. The following are not necessarily personal loan benefits or traps, but more so things to be aware of and on the lookout for when looking to borrow. 

Origination Fees

Some lenders will charge what is called an origination fee, which can be an additional 1% to 8% of the loan amount being requested. If you choose to work with a lender that charges this fee, keep in mind that you may need to increase the amount you want to borrow and factor in such fees if you are set on getting a specific amount, otherwise you may find yourself getting less than planned. These are sometimes referred to as ‘Processing Fees’.

Document preparation fee

Some lenders include this one-time charge to offset the costs of drafting documents in relation to processing your loan request. This is generally a flat fee of $100 or so and taken out of your loan request.

Prepayment Penalties

With some lenders, they will charge a fee if you were to attempt to pay them back ahead of schedule. Depending on the balance owed and the fee charged, sometimes it can be worthwhile and sometimes it isn’t. You’ll have to run the numbers and check both scenarios to determine what is the right choice.

Precomputed interest

You want to ask lenders, preferably before you sign, how the interest is computed for a personal loan. Some will tell you, which is something that you want to avoid, is that it is based on what is called a precomputed basis. When lenders precompute your interest, you would usually pay a larger amount in interest during the earlier months and years of repayment. The preferred answer would be the simple interest method. If you took the full term of a loan, you are going to pay the same amount, but if you were planning to pay off early, like a 5 year loan repaid within 3 years, then you would pay more in interest with the precomputed method.

Other Fees

Probably the most common would be insurance, which many personal loan providers will try including or pitching to you right before closing the loan. Typically they propose life insurance and unemployment insurance for ‘peace of mind’ and such. While such safeguards in place can make sense, you should ask things like how much per month, requirements to be able to claim, along with how much and how long might it pay. Although life insurance can be a good idea and probably best as a separate transaction through a company that specializes in this, the appeal of unemployment insurance is easy to see but often comes with limitations and offers poor value. The best thing you can do is ask questions and decide for yourself. Other fees that might be ones to look for can include Late payment fees, Check processing fees, NSF fees, Annual fees, Commitment fees, Closing fees, brokerage fee, Underwriting fees, Collection agency recovery fee, Nonsufficient funds (NSF) fee, Electronic payment processing fee, Payment convenience fee.

Applying For A Personal Loan –  What Lenders Will Look For

Since applying for a personal loan in Canada does not require collateral, lenders look for a good credit score to help them determine your creditworthiness, what kind of risk you might be, and how likely they are to be repaid what you borrow.

They are also interested in your debt-to-income ratio, or DTI, which can also impact your odds of approval, along with your overall credit score. 

RELATED: How to Prequalify for a Personal Loan

Credit Score

The higher your credit score is, the more likely you are to be approved. Most lenders prefer to see a credit score of about 700 or greater. Also, the higher your credit score is, the better the terms and interest rates will be offered. It is possible to get personal loans with bad credit, and you will simply have higher interest rates. 

RELATED: What is a Good Credit Score

Debt-to-income ratio

While different lenders have different requirements with a debt-to-income ratio, just like with credit score, it’s often said that keeping your below 30% is in your best interest when applying for personal loans. There are some lenders that might consider your application with a debt-to-income (DTI) ratio of up to 43%, but if yours is that high, you might find it difficult to both manage and find a lender.

There are other factors considered but credit score and your debt-to-income ratio would be a couple of the main ones looked at by lenders. Be sure to carefully look at the annualized percentage rate (APR) as it is a much better reflection of the loans true cost since many lenders charge closing fees or other loan-related charges. 

As you begin looking into your options, shopping around and comparing, you will find that if you are prequalified or preapproved for personal loans that you will be in a better place to make the right decision with more information available to you.

Ways to Save with Personal Loans

There are a few ways that you can save when it comes to personal loans, and they are just simple things that you should know.

  • Make your payments more frequent
  • Paying more than the minimum amount
  • Using automatic payments to avoid late fees

Should you come into some new found cash or a windfall like an employment bonus, it would be wise to provide a larger lump sum payment if you have the option, so that you are closer to paying off your loan.You might also look into discounts for something like making automatic payments and try to avoid any charges made for processing checks.

While you can get a personal loan from banks and credit unions, they are not the only option. Online lenders are quickly becoming a preferred method due to their speed, convenience, and higher rate of approval, along with many offering competitive rates.

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