What is an Instalment Loan in Canada?

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Ever been in a situation where you had to fund expenses, and just couldn’t pay all of the money at once? Regardless of your financial plans, emergencies come up that call for extra cash beyond what you can handle at once; that’s where instalment loans come in.

There are chances that you must have come across the term instalment loan. Are you still unsure of its meaning? This article will take you through what an installment loan is and how it works in Canada.

What is an Installment Loan In Canada?

An instalment loan is a financing model that offers a borrower a specific amount of money upfront to be repaid over specified timelines usually within a few months or several years. The repayment duration is much longer than payday loans which are usually within 2-3 weeks.

The lender expects you to repay the loan via a regular payments plan or instalment payment. Instalment payment is a fixed payment system that runs for a stated duration.

When considering an instalment loan, you should not only factor in the product; you should also consider the lender. With an instalment loan, a lender issues a lump sum of money to a borrower who is expected to pay back a fixed amount weekly, bi-weekly, or monthly as agreed.

Instalment loans are used when a large sum of money is needed, and the individual will require an extended amount of time to pay. Hence, instalment loans can be for the following:

  • Personal Emergencies

Personal emergencies can include dental procedures, home, and car repairs, overdue utility bills etc.

  • Important Milestones

This can include marriage, the arrival of the birth of a baby, sponsoring of education.

  • Personal benefits

This can include taking a vacation or buying something costly.

Cost of An Installment Loan

The total cost of an instalment loan depends on the lender and specific terms and conditions. Detailed information about the cost is in the loan contract extended by the lender. The costs you should look out for include:

  • Interest Rates(IR)

Interest rate is the percentage rate your lender charges you for borrowing money. A typical instalment loan interest rate ranges from 6%-13%. This rate is applicable if you have an average or higher credit score.

  • Annual Percentage Rate (APR)

This is the percentage rate your lender will charge you for borrowing money expressed annually. 

  • Fees

This includes origination fees, early repayment penalties, and late repayment fees are common, but there could be others too.

Types of Instalment Loan

Most loans are considered instalment loans because of their financing structures. Instalment loans can either be secured or unsecured. Below are the types of instalment loans in Canada:

Installment Loan Requirements in Canada

Every lender is different and has unique requirements. However, there are some standard requirements that all lenders use for approval. These requirements include: 

  • You must be a Canadian citizen or permanent resident with a legitimate Canadian address.
  • Be 18 years of age (or the age of majority in your territory or province)
  • Have an open bank account
  • Possess proof of income, such as paychecks or recent bank statements

In addition to the above, you can expect that lenders will look at your credit history, employment status, and income to determine if you qualify for a loan. Instalment loan lenders are quite flexible with credit scores. They will want to assess how you have repaid debts in the past.

Benefits of an Installment Loan

  • Fixed Interest Rate

Even if the market changes, your interest rate remains the same. The application process is quick and easy. Usually, if you qualify on the same day of the application, you’ll receive the money within a day. You can start and finish your application online.

  • Credit scores are not relevant

So long as you can demonstrate responsibility with debt repayment and the ability to make payments, most lenders will give you the money.

  • Comfortable repayment plan

Repayments are made on a scheduled date, and the borrower has more control over the term’s length and payment duration.

How to Choose the Best Lender for You

  • Assess your finances

By assessing your finances, you’ll be able to narrow down your loan options as per your financial needs.

  • Reputation

It is always advisable to read customer reviews and testimonials on a lender(s). Read other necessary information from the lender’s website or external sources to ensure their operation style suits your financial need.

  • Communication

Communication is crucial between both the lender and the borrower. How well a lender communicates is a good indicator of the kind of experience you’ll have with them.

  • Find a local lender

There are many instalment loan lenders worldwide, and going local makes life easier for you. It also helps you to narrow down the options available. Research the time it takes for a lender to give you the money. If you need the money urgently, it’s better to look for lenders who offer you the money quickly.

If you’ve gotten serious with the lender, you will get a loan contract. Ensure to review the terms and conditions of the loan. This is to check if you’re okay with their terms and financially comfortable with them. If you are not satisfied with it, you can request adjustments. Focus also on the APR instead of just the interest rates.

How to Apply for an Instalment Loan

First, ensure to research which lender is suitable for you. You can then complete an online application form that should take you about 5 minutes or less. Wait for approval and get your money! You will need the following details when sending your application:

  • Proof of Income

This includes a tax slip, employer verification letter, or any document stating your income.

  • Bank Account

Most online loan providers request a valid and active bank account. It is in this account they’ll deposit the funds into.

  • Age verification

The average suitable age for receiving an instalment loan in most provinces in Canada is 18. Hence, most instalment loan providers usually request a government-issued ID.

  • Citizenship

You must be a Canadian citizen or a permanent resident to be eligible for an instalment loan.

Note that most lenders will evaluate your credit history to ensure you are not currently in debt or close to bankruptcy.

Best Lenders in Canada

Below are some of the best lenders in Canada:

  • Loans Canada

Loans Canada is a loan search platform that welcomes loan applicants regardless of their financial history or credit score. The lender does the researching work for you by providing multiple loan options to choose from based on your application.

  • Loan Canada offers an instalment loan between CA$500 – CA$300
  • Interest Rates: 3% to 46.96% APR
  • Loan Term: 3 months to 5 years
  • Ferratum Money

Ferratum Money has some stricter requirements than other lenders. You must be over 20 years of age and make an average of  CA$2,500 a month while employed full-time for at least three months before applying and having a credit score of 600 and above.

These requirements can lead to lower interest rates. Unlike other lenders, they don’t require applicants to upload additional documents such as photo identification, which helps speed up the application process.

  • Loan Amount: CA$500 to CA$15K
  • Interest Rates: 18.9%
  • Loan Term: 6 months to 5 years

Instalment Loan Drawback

  • High-interest rates – If, after the lender’s evaluation, you pose to be a high-risk borrower, you might be charged higher rates to compensate.
  • The huge sums of money borrowed can cause financial strain if you’re not earning enough to quickly payback.
  • You can’t borrow more money. It’s not as simple as asking for more credit like you could with a credit card.

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Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.