What Are Unsecured Loans?

Unsecured loans are in demand in Canada because they can be used to get cash quickly. This is good news if you have an emergency and need fast cash ASAP. Unlike traditional lenders such as banks, lenders who offer unsecured loans offer more flexible terms and conditions.

If you're thinking of availing this type of loan, perhaps you have questions on your mind. To help you with an in-depth look at unsecured loans, read this article further to prepare yourself.

What Makes An Unsecured Loan Different From Other Loans?

As its name indicates, unsecured loans are precisely that – a loan that doesn't require security. What this means to laypeople is that you don't have to put up collateral to be able to borrow. Compared to secured loans, this puts less burden on the borrower. So, if, for example, your car suddenly develops engine trouble and you have zero savings in the bank, you could immediately avail of an unsecured loan to pay for car repair.

An unsecured loan falls under the category of personal loans, just like secured loans. The main difference is that you will have to provide a valuable asset, like your house or car, as collateral for a secured loan.

Who Offers Unsecured Loans?

Because this kind of lending is becoming so popular, you can find many lenders in Canada who now offer unsecured loans. Generally, these lenders operate via websites so that Canadians can apply for their unsecured loans online. Some lenders may limit the scope of their lending, meaning you have to be a resident of a particular province in Canada to avail of a loan.

How Much Can You Borrow?

The amount you can borrow will differ from lender to lender. Many lenders start lending at CAD$500, and then the range goes up. Some lenders may lend up to CAD$30,000, depending on the circumstances of the borrower and the details on the loan application.

Is There A Fee If You Apply For An Unsecured Loan?

Yes, all online lenders will charge you a certain fee if you take out an unsecured loan. The rates vary from lender to lender, though. The interest charged may range from a low of 13% to a high of 40%, depending on how much you are borrowing. Since there's no collateral to be offered as security, the application process tends to be fast and easy as well.

Why Do Canadians Get Unsecured Loans?

People have different reasons for applying for an unsecured loan. But for many, they borrow because they have an emergency that requires quick payment. Since these people don't have enough savings on hand to deal with the crisis, they try to apply for unsecured loans. Usually, the amount these borrowers need is relatively small, which they can easily pay for with their current income.

Will The Lender Ask You Why You're Getting An Unsecured Loan?

It's possible, but most likely, the lender will simply ask how you intend to repay. Since it's so easy to apply for an unsecured loan, you can get one for any reason. For example, you can apply for a CAD$500 loan to pay for emergency repairs of your car, credit card debt, or college tuition. A small loan can be used in a flexible manner. It's really up to you how much of your loan will go toward a certain expense.

Does Everyone Immediately Qualify For An Unsecured Loan In Canada?

The reason a would-be borrower is required to apply for an unsecured loan is that the lender has to consider whether the borrower is a good risk. The risk the lender assumes when lending goes up because they don't ask for collateral. So, there's always the risk that the borrower will default on the loan.

On the other hand, quick loans like this are much in demand, so these represent a good business opportunity for the lender. To compensate for the lack of collateral, the interest rate of the loan is high. This is good for the lender since they're putting themselves at risk by lending. It's also good for the borrower that the lender doesn't require collateral because the latter won't have to spend much time assessing the value of the collateral. The application process goes much faster this way.

Many unsecured loan companies that operate online can process a borrower's application even during graveyard hours from midnight onwards until morning. This means some lenders operate round the clock, which is convenient for borrowers. Otherwise, you'll have to wait until traditional lenders like banks open for business in the daytime. So, the high interest rate will cover the expenses of the lender's 24/7 operations.

How Do You Qualify For An Unsecured Loan?

You will need to submit documentation to prove that you satisfy the following requirements:

How Many Kinds Of Unsecured Loans Are There?

There are generally three major types of unsecured loans. These are:

Are Unsecured Loans Better Than Secured Loans?

It depends a lot on whose perspective you view the lending relationship. For a lender, a secured loan may be better because they can ask for sizable collateral that has about the same value as the loan amount. So, if you default on your secured loan, the lender can seize the collateral you put up as security for the loan. They can then sell the asset and recoup what they lost when you defaulted on your loan. This is why borrowers tend to apply for larger amounts through secured loans because they know that these assets have value that convinces lenders to approve their applications.

However, the lender may be able to get more borrowers if they offer unsecured loans instead. The amount they will lend may be smaller than those offered through secured loans because the borrower will probably be able to repay small amounts. Since the amount being borrowed is small, the lender doesn't feel the need to get collateral. However, the lender will require an interest rate for the unsecured loan that's higher than those for secured loans. This way, they compensate themselves for the risk they take when offering unsecured loans.

If You Default On Your Loan, Will The Lender Take Your Personal Assets?

This condition depends on your circumstances, particularly if you're declaring bankruptcy. The idea behind applying for an unsecured loan is to avoid putting your personal assets, such as your home or car, up for collateral. However, you did agree to repay your unsecured loan. Thus, no matter what reason you may have for the loan payment default, you are still liable for that obligation. The lender always has the option of filing a lawsuit against you in an attempt to recoup their loss. It will then be up to the discretion of the court whether they will seize your personal assets as compensation for the lender.

You have to understand that lenders charge high interest rates because it's very hard to collect on loan payments. So, it's your responsibility to make sure you have the right 'capacity to pay.' If you want to get an unsecured loan, the first thing you need to do is compute for the manner of payment and factor that into your expenses. That way, you'll easily pay off any debt using your regular income.

If You Find It Difficult To Repay Your Loan, Can You Request For A Longer Payment Period?

The responsible thing to do if you're having a hard time repaying your unsecured loan is to write to your lender right away. Explain to them what the difficulty is so that they can consider extending the payment period for you. The lender might impose a higher interest rate on any unpaid amount since they're taking on even more risk by extending your payment period. But the lender may be considerate regarding your case if you're honest about your loan payment problem.

Will The Lender Accept Advance Payments For Your Loan?

It's usually a good idea to pay for your loan well before the actual due date. The lender may even lower your interest rate if they see that you're a responsible payor. To keep things organized, though, you may write to your lender to explain that you're ready to pay off your debt before the due date you agreed on. That way, the lender could organize their records to factor in these advance payments.

Final Takeaway

In Canada, you can find lenders who offer unsecured loans, and they are legitimate personal loan providers. They offer a good service for people who may have limited capacity to pay. Before you attempt to apply for an unsecured loan, though, check your income level first and assess your standing while keeping your expenses in mind. You should also look at many lending websites to see the kind of interest rates they charge for your preferred loan amount. That way, you won't have any nasty surprises when it's time to repay the loan.