Most common types of personal loans
Unexpected circumstances happen all the time in life. Things like emergency car repairs, health issues, and other non-budgeted expenses can come seemingly out of nowhere and squeeze the monthly financial budget that you worked so hard to maintain. At times, these expenses can rack up fairly quickly and go beyond the amount you can reasonably afford to spend at a given time all at once. For these reasons, a loan that is priced at a fair rate can be an option to bridge your short-term financial needs without having to eat into your other necessary expenditures such as rent, food, gas, etc.
In our day-to-day lives, people take out loans for a variety of reasons. Some of the most common ones are for financing big-ticket items such as a house (mortgages) or a car (auto loans). However, these tend to be secured loans where the underlying asset (i.e., the house or the car) serves as collateral that can be seized by the bank to recoup its capital if the borrower fails to pay. There are also unsecured personal loans that people can use for more immediate purposes. Some examples of these uses include:
Medical or dental expenses
Childcare expenses
Education expenses
Wedding expenses
Home repair costs
Legal fees
Debt consolidation
For all these and more, Magical Credit offers a portfolio of lending products that provides customers between $1,500 to $20,000. Prospective borrowers evaluate and select these loans based on their particular set of circumstances. However, it is not always obvious which loan is right for your needs. The guide below is therefore designed to simplify this decision and ensure that borrowers are making the right decision for themselves.
Choosing a loan: What’s the difference?
To put it bluntly, a $1,500 loan can look a lot different from a $20,000 loan or even a $10,000 in terms of your repayment timelines, monthly repayment amount, and other key terms. As such, you should ensure that the loan you obtain is aligned directly with your needs and repayment capacity.
How do you know which loan is right for you?
$1,500 Personal Loan
As detailed above, the $1,500 loan is for relatively smaller expenses of an urgent nature. In a situation where a borrower is facing a need for an unforeseen expense or if a borrower finds themselves falling slightly short of required funds, a $1,500 principal should be sufficient to fulfil those immediate cost obligations. Some of the particular uses of this loan may include:
Less serious or non-critical medical issues
Dental care (chipped tooth, root canal, etc.)
Less serious or non-critical medical problems for pets
Minor car repairs (new set of tires, bumper, windshield replacement, radiator, etc.)
Minor home repairs (small fixes and upgrades)
For these types of costs, a bank may be a potential option. However, most large banks do not offer loans for a sum of $1,500 or lower. From the bank’s perspective, loans of that size may simply not be profitable enough for them given the additional administrative and regulatory costs they have to face.
It is here where Magical Credit can step in to offer competitive loans with smaller sums and flexible repayment timelines. If you are facing an urgent expense where you are just short of the required funds, contact us today and our team would be pleased to support you in your unique financial needs.
$5,000 Personal Loan
For borrowers with slightly larger expenses of an urgent or semi-urgent nature, a $5,000 loan may be more suitable than a $1,500 one. A $5,000 may also be appropriate if you are thinking of paying back creditors or consolidating your debts. The concept of “debt consolidation” refers to a borrower taking out a single loan to pay off all outstanding debts. Once the individual debts are paid off, the borrower then makes regular principal and interest payments on the large loan, thereby saving time each month, as well as (potentially) money as debt consolidation loans offer lower rates than a credit card for instance. Some other uses for a $5,000 principal include:
Medical emergencies that are not covered by insurance
Advanced dental procedures (such as braces)
Major car repairs caused by an accident or inclement weather
Home repairs (furnaces, boilers, vinyl siding, renovations, etc.)
Legal fees (divorce proceedings, personal injury, etc.)
Funeral expenses
While the above expenses are a guideline, borrowers may have other practical purposes that require a sum closer to $5,000 than $1,500. Ultimately, it is up to the borrower to determine how much they need based on what they can afford to pay from their disposable income and the funding shortfall they will encounter. At the $5,000 level, banks will certainly be inclined to lend to prospective borrowers either as a personal loan where they provide a lump sum or as a revolving line of credit which can be drawn down, paid back, and drawn down again up to a maximum limit. However, the process with a large bank can often be longer as several approvals have to be obtained.
If you are looking for a quick $5,000 loan without having to jump through multiple hoops, Magical Credit can support that via our instant approval $5,000 loan products. Applications take 5 minutes (or even less) and funds can be received within 24 hours.
$10,000 Personal Loan
A $10,000 loan can be useful if borrowers are facing a large expense that has to be paid upfront or if they want to consolidate a significant amount of high-interest debt. This type of loan should ideally not be used for smaller expenses such as minor repairs to homes or cars, or minor medical or dental processes. A $10,000 can incur quite a large interest cost per month, and so should only be used by borrowers who have a comfortable source of income that can cover monthly payments, but cannot afford to pay the $10,000 right away. Some of the uses of a $10,000 personal loan may include:
Large home improvement projects such as renovations or major repairs like roofing
Major medical processes not covered by insurance
Children’s education or tuition costs
Wedding expenses
Funeral expenses
Debt consolidations of $6,000 or over
There can certainly be other instances where a borrower may need $10,000 (or more) that are not covered above. It cannot be emphasized enough though that sums like these must be treated with caution. Lenders such as the big banks only lend $10,000 or over on an unsecured basis to borrowers with healthy credit profiles, stable incomes and strong credit scores. Loans are given out either as a term loan or a revolving line of credit depending on borrower needs and preferences. If you are in need of a $10,000 loan but do not have quite the credit profile that fits bank parameters, reach out to our Magical Credit team and we will be glad to assist you!
$20,000 Personal Loan
Like the $10,000 loan, the $20,000 loan is also a product that can be used for big-ticket items where a cash payment needs to be made upfront. However, this is an even bigger commitment than $10,000, so borrowers need to be double sure that they will be able to service the debt obligations (principal plus interest). Loans of this size should only be obtained when there is truly a need for such a large expenditure. Some instances of this may include:
Large home improvement projects such as renovations
Major medical processes not covered by insurance
Children’s education or tuition costs
Wedding expenses
Given that $20,000 is a substantial principal amount, banks in Canada will likely only lend to borrowers who have demonstrated exceptionally strong credit profiles. If you need to get a $20k loan but don’t have a credit score that fits bank criteria, we at Magical Credit are here to help. Our team takes a prudent needs-based approach to credit evaluation. While we strongly believe in providing second chances to borrowers in need, we also work with you to ensure that you are able to make your repayments on time to help bolster your credit score over time.
FAQs
What type of loans do banks offer in Canada?
In Canada, you can get a variety of personal loans depending on your needs and credit profile. The most common types of loans you will see are:
Term Loans: A lump sum provided upfront by a lender that then has to be repaid over a set time period as specified in the loan agreement.
Revolving line of credit: A line of credit works similarly to a credit card where there is a set limit on how much can be drawn down. Once a LOC is drawn, the available utilization drops by the same amount and is replenished when the borrower makes a repayment.
Home equity line of credit: A HELOC uses the equity accumulated in a borrower’s home as collateral for a revolving line of credit. All things equal, this usually has a lower rate of interest than an unsecured revolving LOC as there is less risk involved for the lender.
What are personal loan rates in Canada?
Rates on personal loans can vary widely depending on the borrower’s credit profile and the lender in question. There are also specific conditions of the loan that can impact the interest rate charged on the loan. Some of these conditions include:
Term: Longer loan terms generally come with a higher rate of interest than shorter loan terms because the lender is lending out capital for a longer period of time (which introduces greater uncertainty).
Security: Unsecured loans are typically more expensive than secured loans as in a secured loan, there is recourse for the lender to recoup their money in the event that the borrower defaults on payments.
How much can a bank loan out?
The answer here is that it depends. Banks make a decision based on the borrower’s personal credit profile, total asset base (cash in the bank, properties, etc.) and relationship with the bank. Based on all of the above factors, banks can lend up to $25,000 or even more in many cases if a borrower has a strong history with the bank and a strong credit score and/or history of repayment.
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