A personal loan can help you plug those budget gaps that come with low pay or income. But since there are variations of personal loans, it’s vital that you familiarize yourself with the features of each before appending your signature on that loan application form. Learn the ins and outs of unsecured loans as outlined herein.

A good place to begin your search for an unsecured loan in Canada is Smarter Loans, a website where you can find Canada’s top personal and business financing providers. 

How Unsecured Personal Loans Work

With an unsecured personal loan, the borrower does not any item as collateral for the loan. Unsecured loans attract a fixed interest rate which eliminates traps and unpredictability common with using credit cards. The fixed interest rates also make it easier for the borrower to pay the loan since it is repayable in fixed installments.

Unsecured personal loans can be obtained through online lenders, credit unions, and traditional banks.

When to take an unsecured personal loan

Unsecured loans usually attract a higher interest rate than loans secured with collateral. This means while you can take these loans at your discretion, the associated costs can lead you to a financial trap if you don’t have the resources to pay back the loan. That’s why it makes sense to only take an unsecured loan if the expenditure can be justified. Unsecured loans are best for;

  • Debt consolidation

If you have multiple loans that are costing you large amounts of money in form of interest, it’d be wise to consolidate the loans by taking a larger, unsecured loan to pay off the ballooning debts. There is a good chance that the interest payable on the consolidated loan will be much lower than the cumulative interest payable on the separate loans.

  • Emergency situations

If you find yourself in an emergency situation and don’t have another cheaper alternative, then unsecured personal loan can provide a respite out of the situation. 

Types of unsecured loans

Unsecured loans vary depending on their features and the target market. Mainly, these are the main categories of unsecured loans.

  • Signature loans

These are loan facilities offered by banks and credit unions and where the borrower only needs to sign for the loan to be approved. These loans amortize over time and attract a fixed monthly payment. For example, cash loans in Canada primarily work this way.

  • Student loans

These loans are extended to individuals seeking to fund their education. These kinds of loans come with friendly features such as interest subsidies, grace periods, and flexible repayment options. Other than the requirement that you have to be a student to be considered for student loans, there are few other hurdles to put you off.

  • Peer-to-peer loans

For this kind of credit facility, you borrow another individual in place of seeking the loan from a bank or a credit union. Most of the transactions for peer-to-peer lending are done online where you can post your loan application on multiple websites with the hope that lenders will consider your application and fund the loan. They defined by competitive interest rates and fixed-rate installment.

Parting shot

Unsecured loans give individuals with no assets to offer as collateral an alternative borrowing platform. Though they are readily available, they attract a higher amount of interest making them attractive across the divide. Visit Smarter Loans regularly to see the latest options for unsecured loans in Canada.