Personal loans can be used for numerous reasons, from paying education expenses and consolidating debt to covering emergencies. They’re unsecured so no collateral will be required.
Secured personal loans are loans secured with collateral such as cash assets, certificates of deposit (CDs), or savings accounts backed by collateral – providing lower credit score borrowers the chance of approval. Unsecured personal loans are based solely on an individual’s credit score, income, and debt-to-income ratio. Therefore, there is no guaranteed approval for poor credit in Canada.
1. Collateral
Personal loans are typically unsecured loans; however, some lenders may require collateral as security against potential loan default. Collateral can include anything of value such as savings account money or certificates of deposit held as security by you – or your car if needed as security against missed loan payments by taking ownership of said asset instead of just taking control of debt payments directly from you. Collateralized personal loans tend to come with lower interest rates than their unsecured counterparts as their financial risk decreases significantly.
As it is common practice among lenders to require collateral if you have poor or limited credit, and also for large sums being borrowed, collateral may also be requested if needed.
While any asset may serve as collateral for a personal loan, you should use liquid assets that can easily be liquidated should it become necessary. Instead of using assets like houses and vehicles as collateral for smaller personal loans, consider using your savings or certificate of deposit account from one lender as collateral such as Credit Union 1 or Upgrade’s member-owned Credit Union 1. Both these banks offer low rates for secured personal loans backed by savings accounts at low costs with rates comparable to top banks for unsecured personal loans.
2. Credit Score
Your credit score plays an integral part in your eligibility when seeking personal loans or other types of credit, such as student loans. A credit score is a numerical representation of your financial history that helps lenders predict whether you will pay on time for payments made. While different scoring models exist, all use similar data sources from your credit reports when making predictions based on them.
Credit scores help lenders decide whether to grant you a loan and the terms for it, as well as how much interest to charge you. Your score also plays a role in how much collateral will need to be put up as security; while higher credit scores often translate to reduced rates and expanded loan eligibility.
The minimum credit score available is 300, which indicates no or very limited credit and an impaired history due to bankruptcy, foreclosure, or excessive loan defaults. Lenders usually recommend rebuilding your credit before applying for loans with bad credit; personal loans may still be an option but may require collateral and more stringent requirements.
Personal loans can help build and improve your payment history and credit score. Paying down debt will also build your profile over time. No matter which loan you select, it is wise to shop around and compare rates and terms before applying – many lenders provide prequalification checks that won’t hurt your score!
3. Income
Lenders put great stock in income and payment history when awarding personal loans, so having an excellent record of making on-time payments can result in more favorable interest rates for unsecured personal loans than secured ones. Unsecured personal loans don’t rely on collateral like your car or savings account as a security, instead being secured by trust from their lenders if payments fail; should that happen they may seize any assets to repay what is owed.
Lenders generally approve applicants with credit scores in the low 600s as long as their debt-to-income ratio remains manageable. An Ottawa personal loan can help people pay off existing debt or finance home improvement projects; if yours falls in this range, consider improving it by disputing errors on your report prior to applying.
If your credit is less than perfect, alternative forms of borrowing such as payday or auto title loans may be worthwhile options for you. But make sure that before choosing any lender that you shop around; being prequalified with several can allow you to compare rates without negatively affecting your score and give an idea of the maximum lending limit you might qualify for based on both your financial profile and credit score.
4. Employment
With numerous non-bank financial companies (NBFCs) and digital lenders offering personal loans with competitive interest rates, it has never been simpler for employees to secure a loan that will ease their financial worries. Personal loans offer employees quick cash and savings that help them manage their finances and budget effectively, helping to meet emergency expenses as they arise.
Accessing such loans may depend upon your employment status and your ability to repay payments on time. Temporary workers with strong employment prospects should bring in contract extensions or offer letters from new jobs as proof that their income source will continue beyond the expiration of their current contract. Cosigners with outstanding credit ratings can also increase the odds of loan approval.
