When you are thinking about consolidating debt, making a large purchase, covering unexpected expenses, making a large purchase or possible home renovations, a personal loan can be the option that you are looking for when looking to reach a financial goal.
One of the most common reasons for Canadians to consider personal loans is often debt consolidation of credit cards or other loans. This can simplify your payment schedule, and make for one on a specific date rather than several across multiple dates. But more importantly, you might be able to get a personal loan with a better interest rate than what you currently pay. This can be especially true with high interest rate credit cards at times.
What is a personal loan?
A personal loan is a type of unsecured loan that can be taken out for any number of personal reasons. This is a type of installment loan, where you are provided a lump sum of cash if approved, and you would repay this amount with regularly scheduled monthly payments until the loan amount along with interest and any fees involved are repaid.
How to qualify for a personal loan?
If you are interested in a personal loan, a Canadian lender will review your application, along with your credit score and history, to determine what risk you might pose, creditworthiness, and the likelihood of you repaying the money you want to borrow. Those looking to borrow a personal loan will find that when you have a good to excellent credit score the interest rates are more in your favour than compared to someone looking for personal loans with bad credit.
But even those with poor history can be eligible for bad credit personal loans, as every lender is different in who and how they accept applicants.
When should I get a personal loan?
So long as your credit score is 600 or higher, you probably have a reasonable chance of being approved for a personal loan or installment loan. However, the lower your credit score, the more likely it is that you will pay more in interest. The right time to think about getting a personal loan would be when you have a good credit score, low Debt to Income ratio (DTI) and when you would be able to comfortably make the monthly payments.
The average credit score is closer to 660 in Canada, so if yours is less, you can probably expect that you will have to pay more in interest.
When should I use a personal loan?
If you find yourself struggling with debt, a personal loan to consolidate and pay off credit card debt can be the answer. Debt consolidation usually involves obtaining a personal loan and using the funds to pay off said debt. It is worth noting that doing so should be at a lower rate than the average you might be paying across the credit cards.
When is a personal loan a bad idea?
You could say that personal loans would be an expensive way of financing any purchases that might be seen as non-essential expenses. This might include weddings, vacations, or possibly big-ticket items.
There are a variety of circumstances where a personal loan might be a bad idea. Such as refinancing student loans, which probably have an interest rate under 10% unless you went with a private lender.
What are the top reasons to get a personal loan?
A personal loan is an unsecured loan which you are free to use any way that you choose. Some of the more popular reasons include debt consolidation, home remodelling, moving costs, large purchases, medical bills or emergency expenses are just a few reasons.
You might be looking to consolidate your credit card debt to roll it all into one easy payment with a better interest rate. Perhaps you want to do a bathroom renovation or cover the costs associated with moving. You might be thinking to replace or upgrade an appliance rather than waiting for months until you save enough money to be able to afford them.
More: How to Eliminate Credit Card Debt with Personal Loans
Should I get a personal loan?
Everyone has a different situation for their need to get a loan, but unfortunately most of us either have debt or expenses to take care of and a personal loan can be a good option much of the time when you need to pay off your debt.
Before you think of applying for a personal loan you should take a look at your own personal finances to see whether you are able to afford a regular monthly payment and how it might affect your cash flow and budget.
While using a personal loan for less essential options like a vacation or another cost is not always advised, your situation might be that the timing is right and you are willing to pay the cost of the interest since getting time off can be a challenge. In the end, only you can decide whether you should get a personal loan. Just be sure to look at the pros and cons before you try to rationalize a decision and approach it objectively.
What to know before getting a personal loan?
Start by knowing your credit score before you start comparing personal loans. Many lenders have minimum requirements and a credit score is an important factor. This will also make your search easier to find a loan you might qualify for.
Find a few loan options that are of interest? Get yourself pre qualified by completing applications to get estimates on interest rates and what your options look like. Be sure you understand there is a vast difference between pre-qualified vs. pre-approved.
Making your monthly payment on time to repay your loan is important. Being late could affect your credit score, which could mean if you want a personal loan in the future the interest rate could cost you more if you affected and increased your credit score with a late payment.