10 Types of Loans for Canadians (and 2 Alternatives)

There are many types of loans available in Canada, with the most common being personal loans, payday loans, and auto loans. And there are many places where Canadians can take out loans, including banks, credit unions, and private lenders.

With so many options on the table, it's essential to understand what loans entail before deciding which is right for you and committing yourself to potentially lengthy payoffs. We’ve written this article to help you through the process.

Advantages and Disadvantages of Loans

Before we dive into the specifics, let's mention some loan benefits and drawbacks.

Strengths

Some of the most significant pros of getting a loan are:

• Loans can help you start or grow a business.
• They can come with relatively low interest rates, depending on the type of loan and your creditworthiness.
• Loans offer you a way to access the money you need to finance something urgent, such as a time-sensitive medical procedure.
• They can help you improve a bad credit score, consolidate debt, or finance a large purchase; if you wish to learn more, consider reading our tips on how to increase your credit score.   

Weaknesses

Some of the biggest cons of getting a loan are:

• They may require a good credit score.
• Loans tend to have high interest rates. 
• The loan term might be either too short or too long for your requirements.

Loans Available in Canada

Now, let's see what types of loans are available in Canada and what they typically entail. 

Personal Loans

You can use a personal loan for anything save college financing, including:

• Debt consolidation
• Home improvement projects
• Unexpected medical or dental expenses
• Major life events, such as a wedding or a trip
• Other significant purchases or unexpected expenses

The terms of a personal loan can vary, but they typically last anywhere from one to seven years. The loan terms and the client's creditworthiness are the main factors affecting the interest rate. Personal loans may have a variable or fixed interest rate.

Two primary forms of personal loans are available for Canadians: secured and unsecured.

Secured Loans

A secured loan is backed by collateral, such as a home or car. You can get this particular type of loan more easily. That’s because lenders see secured loans as less risky, since they can seize your property if you fail to pay the entire loan amount.

Unsecured Loans

An unsecured loan is not backed by anything except the borrower's signature, so it is more difficult to qualify. Lenders offering such a loan usually require a better credit score from the borrower and charge higher fees or interest rates due to the risk.

Payday Loans

Payday loans are typically small, short-term loans lasting from two weeks to a month and due on your next payday. They can be easy to get but costly, since the interest rates on payday loans are usually much higher than those on other loans (up to around 400% APR).

Before agreeing to anything, ensure you understand the terms and conditions of the loan type you’ve selected and make sure you’re confident that you can repay the loan on time. Otherwise, you could end up in a lot of financial trouble.

Student Loans

The two main types of student loans in Canada are government-sponsored and private loans.

Government-sponsored (or federal) student loans are offered to eligible students attending designated schools. Federal student loans are tax-deductible, unlike private ones. Students can apply for a loan in most Canadian provinces and territories, but the amount they receive depends on:

• Family income
• The province or territory of residence
• Tuition fees, accompanying student expenses, etc.

Paying back interest differs significantly between private and government student loan types. Students eligible who take out a private loan are in charge of all the interest that builds up immediately after the loan has been agreed upon. 

Check out our article on average student loan debt in Canada to learn more.

Debt Consolidation Loans

Debt consolidation loans are personal loans allowing you to pay off multiple debts with a single, larger loan. They can help you simplify your monthly payments and reduce the total interest you pay on your debts. Depending on the arrangement, they might also help lower monthly payments, giving you some breathing room in your budget.

Mortgage Loans

Major banks usually give out mortgages for houses or other major purchases. The borrower agrees to pay back the loan over a long period, generally ranging from 10 to 25 years. The interest rate on mortgage loans, which are among the most common types of loans, is typically competitive, since lenders know that long-term clients will give them a steady income.

Home Equity Loans

Home equity loans are secured loans allowing you to borrow against the equity in your home. Equity is the portion of your home's value you own or have already paid off. Thus these loans are known as second mortgage loans. For example, if your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in equity.

Home equity loans can provide a lump sum of cash that you can use for anything from home renovations to debt consolidation. The terms of home equity loans are typically five to 30 years. Since homes are used as collateral, clients could lose them if they fail to pay either mortgage or home equity loans.

Auto Loans

Auto loans are money loans used in Canada and elsewhere to purchase vehicles. The four-wheeler serves as collateral for these secured loans, which means if you default on the loan, the lender can seize and sell your car. Auto loans typically have terms from three to eight years and require monthly payments.

It's worth noting that car dealerships, besides credit unions and banks, can help their clients find the best auto loan for themselves. If you wish to learn more about auto loan interest rates, check out our overview of Canada's average car loan rate.

Credit Builder Loans

A credit builder loan is designed to help build your credit by holding the borrowed money in a bank account. Credit builder loans are typically small, with low interest rates, and repaid over time. The credit builder loan range is typically from $300 to $3,000, while the APR usually fluctuates between 6% and 16%.

You can build up your credit history and improve your credit score by making timely payments on the loan. This can make it easier for you to qualify for other types of bank loans or unsecured or secured loans in the future.

Small Business Loans

Small business loans are typically used to help start or expand a small business. You can use these loans for a variety of purposes, including but not limited to equipment purchases, inventory, working capital, or even expansion. Note that you'd have to satisfy more requirements to qualify for these than you would for personal loans.

There are a few types of loans that small businesses can apply for:

• Term loans
• Equipment loans
• Working capital loans
• Small business loans

These loans help companies with up to 300 employees fund their operations. Local businesses such as landscapers, hair salons, restaurants, or family-owned grocers are eligible for these types of loans. Sole proprietors, such as freelancers with traditional day jobs, can also apply.

Immigration Loans

Immigration loans are available to immigrants who are in the process of becoming Canadian citizens. These government loans can help cover the cost of the citizenship application fee, as well as other associated costs, such as travel expenses. The terms of these loans are typically short and they usually cover small amounts.

Alternatives to Loans

Now that you have an understanding of the different types of loans in Canada let's review a few alternative funding options. 

Peer-to-Peer Lending

Peer-to-peer (P2P) lending, also known as crowdfunding, is a type of alternative financing where individuals can borrow money without going through a traditional financial institution. There are no standard terms or interest rates for P2P financing; it all depends on which platform you go through.

Invoice Financing

Invoice financing is another loan alternative that allows businesses to borrow money against outstanding invoices. With invoice financing, companies can get quick access to cash and cover short-term expenses for a fee (and/or percentage rate) the invoice financing provider charges once the buyer pays the invoice. In essence, you get your money immediately, but you lose a certain percentage of it.

Summary

There are many types of loans available in Canada, including secured and unsecured personal loans. Each long- or short-term loan agreement relies upon factors such as the required credit score, loan interest rate, and repayment terms.

It's essential to compare different types of loans carefully before deciding which suits you. Remember that some loans require collateral, such as a car or home. So, consider your options carefully, especially if you need to commit long-term.