What are the Best Unsecured Loans in Canada for 2022?
Unsecured loans are one of the quickest ways of borrowing money. Unlike secured loans, there isn't a long wait while the lender assesses your assets and collateral. For this reason, they are a popular way of borrowing money.
At the same time, this freedom comes at a price. Unsecured loans will generally have higher interest rates, less flexible repayment terms and lower maximums. Read on for a full breakdown of what unsecured loans are, how they work and their advantages and disadvantages.
What is an unsecured loan in Canada?
Unsecured loans are sums of money borrowed from a lender that does take assets like a car or home as collateral. These are by definition usually personal loans. Car loans or mortgages are by definition secured loans where the vehicle or property serves as collateral. As unsecured loans are riskier for the lender they will typically offer less favourable terms than secured loans or require a borrower with a solid credit score. These may include:
- The lender is less willing to approve a loan to someone with a low credit score
- The lender may ask for as much as double the interest rate vs a secured loan
- The lender may impose a tighter repayment schedule and stricter penalties
Good to know
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If you can get a secured loan, you will likely get a better deal from lenders. Let's take a look at the sorts of assets lenders will typically accept as collateral:
- Home equity
- Savings accounts
If do not possess any of these assets then you will need to negotiate an unsecured loan from a lender.
How to get unsecured business loans in Canada?
Unsecured business loans have an interest rate based on the Bank of Canada rate, with additional interest added to reflect the lender's assessment of risk. As with an unsecured personal loan, interest rates will be higher and terms and conditions more strict. Business loans are often secured by collateral such as machinery or property. Businesses with a strong banking relationship are usually able to negotiate unsecured lines of credit.
How do you take out an unsecured loan?
Unsecured loans can usually be obtained faster than secured loans because the lender does not need to assess your collateral. However, they will still need information about your employment record as well as typically three months' bank statements. You can negotiate a repayment period with the lender which may be a period of a few months or up to ten years. To find the lowest interest rate personal loan on offer, try our personal loan comparison tool.
Lenders will take your credit score into account before approving a loan. For help improving yours see our credit score guide.
As with all loans you must be of age in the province you reside in and possess a government id.
Can you get unsecured loans with bad credit?
It is possible to take out an unsecured bad credit loan however you should be careful when reading the terms and conditions as penalties are likely to be harsher and you will probably have less ability to renegotiate your repayment schedule.
Even loans which are unsecured with bad credit are still less punitive and restrictive than payday loans, however, and it is worth looking at all lenders to find an unsecured loan before approaching a payday loans company.
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How to choose between unsecured loans vs secured loans?
The difference between unsecured and secured loans is that with the latter you offer up an asset as collateral to the lender. This means the lender can offer a lower interest rate and more favourable repayment terms. Let's take some examples:
Keep in mind
Milly, 29, is renting an apartment in BC and needs a loan to start a catering business. She doesn't own her home and she doesn't have a car or any expensive jewelry. She, therefore, has to choose an unsecured loan. She borrows $19,000, at a rate of 22%. Over a ten-year repayment period, she will pay $393 monthly. In total, she will repay $47,127 to cover her debt.
And, by contrast, let's look at a secured loan example:
Keep in mind
Guendalina, 61, a homeowner in Ontario, is taking out a loan to turn her basement into a music studio for her grandson Paulie. She can take out a secured loan, using her three-bedroom house as collateral. This means that if she misses repayments then her home could be at risk. She borrows $19,000 at a rate of 10% and has a ten-year repayment plan. This means she will make monthly payments of $251 a month. Over the ten years, in total, she will repay $30,130.
A secured loan is a much better deal for a borrower. Milly has to pay $142 a month more than Guendalina for borrowing the same amount. Over the ten-year repayment period, Milly will have to repay $17,000 more than Guendalina owes and more than double the amount of the original loan.
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It is clear that in comparing unsecured loans vs secured loans one is a much better deal. Significant savings in monthly repayments and a huge, overall saving in the total amount that must be repaid.
Which are better: unsecured loans vs payday loans?
Payday loans are quickly approved loans that are tightly regulated by Canadian law. They are limited to $1,500 and have upper limit restrictions on interest rates. Regulation varies on a province-by-province basis.
You might be tempted to choose a payday loan over an unsecured loan because of the higher approval rate. However, payday loans can be tricky. They should never be used to pay off another debt or you might find yourself trapped in a debt spiral.
If this happens to you, you should think about unsecured debt consolidation, filing a consumer proposal, or declaring bankruptcy.
Good to know
The Canadian government has advice for people who are experiencing a "debt trap".
Before getting a payday loan you should consider:
- The moment you deposit a cheque you can access $100 of it. If you deposit a cheque another way (e.g. an ATM) you can access $100 on the next business day.
- Writing to people or businesses who have lent you money might let you renegotiate repayments.
- Getting a cash advance on a credit card results in a much lower interest rate than that of a payday loan.
If your finances are out of control then speak with a financial advisor today.
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