The credit market offers a wide range of credit products that vary according to the purpose and type of lender (bank, credit union, payday organization, pawn shop).
Larger loans are provided by banks for planned expenditures such as the purchase of real estate or movable property. These products are needed when your savings are insufficient for a major purchase (car, house or apartment, mobile home, caravan, etc.) or you have decided to keep some of your cash and reduce expenses in time. Such loans require that the borrower has a good credit score and meets other criteria set by the bank.
Sometimes we just need extra money quickly because we have a strong temporary financial stress. The reserves you have built up may not be enough (or you may not have any reserves) to pay for urgent medical bills or car repairs, or your income may have shrunk due to deterioration in the market and before you can make long-term decisions to remedy the situation, you need cash here and now. In such cases, some people use the option of a payday loan or an installment loan, which has basic requirements, flexible terms, and an interest rate similar to a credit card.
What are installment loans?
Installment loan refers to a large group of different types of credit, for example, mortgage, car loan, payday loan, student loan, etc. that must be repaid within regularly scheduled payments.
Bank mortgage products include:
- Purchase of first home;
- Purchase of the next home;
- Renovating a home;
- Purchase of an investment property;
- Refinancing a mortgage.
When you buy a home, you must be prepared to make a down payment. The amount of the down payment varies not only from bank to bank but also depends on the value of the home.
For car loans, some lenders set a guideline for the maximum age of the vehicle. For example, it may be 8 years. Sometimes special car loans are offered for specific car manufacturers such as Chevrolet, Chrysler, KIA, Hyundai, Tesla, Alfa Romeo, Jeep, etc. The trade-in reduces the cost of the loan.
The general category of personal installment loans referred to as vehicle loans includes сar loans, boat and ship loans, motorcycle and recreational vehicle loans, and recreational vehicle loans.
With a graduate car loan, you can purchase your first vehicle before your first salary and even have the option of a grace period. To apply for this type of loan, you'll need to provide adequate proof of graduation, as with student loans. Some student loans are only available to full-time students.
Loans involve regular, scheduled installment loan payments. The repayment schedule is a document of the same scope as the loan agreement.
Legal installment loans mean a temporary financial solution for lack of money without hidden fees. It can be an installment loan with a credit check or another installment loan offered by an alternative financial institution, depending on your situation, short-term loans with a weekly payment schedule, or monthly payments automatically withdrawn from your account.
Installment loans are often also referred to as personal loans because they are not associated with business purposes and are paid out to private individuals for them to cover unexpected expenses, for example.
All of the above categories have one thing in common. The borrowed amount must be repaid over a certain period (repayment schedule) ranging from a few weeks to 30 years. Repayment is made in installments, which usually include interest and principal. Some loan products have a different repayment schedule where there is a grace period (e.g., some student loans) and the first installments consist of the principal only. The loan terms (such as the annual percentage rate, fees, payment schedule, and loan application details vary from loan to loan).
Where can I obtain an installment loan?
Installment loans in Canada can be obtained from a variety of lenders, including banks, credit unions, and instant lenders (who specialize in personal loans and payday loans).
Whether you can obtain an installment loan from a particular lender depends on its eligibility criteria. Some borrowers cannot borrow from a bank or credit union because they have a problematic credit history and consequently a poor credit score. For such reasons, many Canadians have to turn to alternative lenders and pay high-interest rates on their cash loans.
Some lenders specialize in certain niches, such as lending to freelancers, lending to travelers who need a new RV or caravan, financing trucks, or financing purchases. Specialized lenders may have a deeper insight into your niche and offer better financial solutions even without a credit check.
General installment loan regulation in Canada
Installment credit is regulated at both the federal and provincial levels. The federal-level establishes general binding principles for credit terms, agreements, and costs. The local level has the authority to impose further details and restrictions to protect the rights of borrowers.
Legal sources regulating installment loans include:
The Trust and Loan Companies Act sets the framework for clarity of agreement, readability of text to prevent lenders from hiding information from borrowers, and transparency of repayment terms and loan costs.
The Criminal Code of Canada contains important protections for borrowers: lenders are prohibited from charging criminal interest rates, which under Article 347 are 60% PA (but this does not apply to payday loans, which remain very expensive and risky).
In Ontario, British Columbia, Alberta, New Brunswick, and Prince Edward Island, payday lenders can charge a maximum of $15 for every $100 they lend within two weeks. This fee may seem small, but measured against the annual interest rate, it accounts for 391 percent.
In Manitoba and Saskatchewan, the maximum fee is $17 per $100, or 443 percent per year. In Nova Scotia, payday lenders are allowed to charge even more: $19 per $100 (495 percent per year). But that's not all: lenders in Newfoundland and Labrador can charge $21 per $100 (548 percent per year).
Quebec is the only province that has effectively banned payday loans. Interest rates on all loans in this province are capped at 35 percent. This makes short-term lending in Quebec unattractive because it generates less interest income.
Student loans are additionally regulated by Student Loans Act. It provides information on guaranteed students, lighter loan loads for full-time students, and grace periods. Such federal policies aim to support young professionals and make the dream of a quality education a reality.
Mortgage loans are regulated by the Mortgage Protection and Mortgage Insurance Act. It requires that the borrower's or guarantor's credit score must be at least 600, and in addition, the gross debt ratio and total debt may not exceed 39% and 44%, respectively. So as you see credit check for some installment loans in Canada is mandatory under effective legislation.
How to qualify for an installment loan?
Qualifying criteria for installment loans vary depending on the type of loan. The strictest criteria are established for mortgage loans. In addition to demonstrating a stable income and positive credit history, you must make a down payment, pass a stress test if you want to qualify for your loan, and confirm that your income-to-income ratio gives you enough wiggle room to finance and service the loan.
A car loan is usually smaller than a mortgage loan but is considered serious and risky, so additional insurance is required until the loan is repaid. The criteria for obtaining such a loan in Canada are similar to the above loan:
- A government-issued cash flow ID document;
- Proof of residency;
- Proof of income;
- Proof of insurance;
- Proof of being a student (for student loans in Canada and grad-car loans);
- Active bank account with cash flow confirmed by bank statements;
- Age of majority according to the legislation of your province;
- Signed consent to credit check.
- Credit scores for approval generally must be at least 650.
If you do not have a good credit score, you may be required to make a down payment or set it higher than the standard requirement for the loan product.
In addition to the above criteria, there are the following requirements for installment loans (you will need to check with your lender for details, as the process may vary slightly):
- an open bank account and the history of this account;
- sometimes you need to provide a guarantee;
- collateral (for some loans such as title loans).
By law, lenders must make clear who is eligible for a personal installment loan and under what conditions. It is important to read them before applying for a loan online.
In doing so, the lender may make an exception for you if you can prove that you can repay the loan. Professional lenders are always able to suggest the best financial solution for your situation.
Also, some lenders are set up as credit unions where you can get comprehensive financial services and advice from professional advisors on your situation. Almost every lender has either a blog or articles with financial tips, but if you pay attention, these materials are not tailored to your situation and lenders warn against it.
Taking out a loan can be necessary and safe if you do it right and do not overestimate your financial capabilities. Even if the lender does not check your income-to-expense ratio, you'll have to weigh it yourself to make the right decision and avoid dangerous loan cycles.
Major types of installment loans
There are several classifications for installment loans range. The most common is the one based on the availability of collateral:
- Installment loans secured by collateral (movable or immovable property);
- Unsecured installment loans.
- According to the purpose of the money, we should name such main categories as:
- Mortgage loans;
- car loans;
- student loans;
- Refinancing loans by their respective types;
- Consumer installment loans (meaning current expenses);
- Payday loans.
There is also an informal breakdown of installment loans by type of application and communication with the lender:
- Offline;
- A mix of online and offline;
- Fully online.
We must mention that fully online loans are usually payday loans with a high APR. Banks and credit unions are highly automated, but require more personal involvement in the lending process.
The amount of the loan varies depending on the type of loan, where you live, and the lender. However, there are some averages to give you an idea of what to expect:
- The application fee can be $25-$50. The processing fee (if charged) can be over 1% and up to 5% of the loan amount;
- Early payment fee can be 2%-5%;
- Late fees or NSF fees may range from $25 to 50% or higher (and your bank may charge additional fees for using an overdraft);
- Installment protection insurance (if applied) may be 1% or more.
- The cost of a personal loan can range from 1.9% for secured loans to 5.75% up to 60% (or higher if it is a payday loan where the interest rate applied depends on your state's regulations).
The interest rate depends on several factors:
- Credit score;
- Income;
- Debt-to-income ratio;
- Collateral or no collateral;
- The loan amount and the term;
Type of lender (banks and credit unions have higher requirements but usually offer a fixed interest rate, while other lenders may apply a variable rate). Credit score general drop-down:
- A poor credit score is when you have 300-559 points;
- 560-659 - means fair;
- 660-724 - good credit score;
- 725-759 - very good;
- 760 and above - excellent.
Large banks and credit unions may offer personal interest rates for good customers. Payday loans can cost much more than 300% APR.
Can I repay before the loan term is over?
Installment loans may be repaid before the end of the loan term. Some loans, including mortgage loans, may have a penalty fee for early repayment. You should check with the lender before signing the loan agreement.
Some lenders offer special terms for early repayments, such as allowing you to increase your regular payment amount. Some lenders limit the annual prepayment penalty.
You should ask the lender about prepayment penalties and early repayment penalties for your loan product. If you can repay your loan earlier than the schedule calls for, you can release some of your future cash.
What if I miss a payment?
When you sign a loan agreement, you agree to abide by the terms of the loan, which includes adhering to the repayment schedule. The consequences depend on the lender and the type of repayment procedure. For example, installment loans repaid by direct debit often have an NSF fee, which can be $20 or more. You may have to pay penalty interest until you repay the past due installment.
If you realize you have fallen behind on repayment, it's always better to let your lender know and use the options offered to get you back on track with minimal losses. It does not matter if your lender is a for-profit or a non-profit organization, they are interested in good debt service. Transferring toxic assets (bad loans) to collection agencies is also possible. This could mean a lawsuit against the borrower, and any legal fees incurred by the lender to collect the money would be charged to the borrower. If the original reason for applying for a loan was financial hardship, you could find yourself in much greater trouble and financial difficulty. In addition, your credit score could deteriorate if the lender discloses such information to credit reporting agencies.
Some lenders are willing to grant deferred payments during the term of the loan 1time without penalty. It is important to clarify such details with the lender when you have just started your application or pre-approval process.
Installment loans pros and cons
There are always two sides to taking a loan. Let us first talk about the positive sides for the borrower.
Pros
- you can get the amount of money you need for your purposes without having to wait until you earn it or have enough savings to pay affordable fixed payments;
- you can make major purchases or pay urgent bills quickly;
- if you have a good credit score, you can get a personal installment loan from the bank or credit union at a more favorable interest rate than other lending institutions;
You have a certain time frame for repaying the loan, so the burden of repayment is staggered over time;
- possibility of debt consolidation;
- is a credit check for installment rose is done and you do well with repayment you have serious chances to improve their material.
- unless the loan is a mortgage, auto loan, or title loan, collateral is not required or demanded;
- Personal loans can be used as refinancing to consolidate debt and lower the interest rate.
Cons
- some lenders do not check your credit score and debt load, which can cause problems in your budget;
- personal installment loans (especially payday loans) mean a short-term solution;
- banks and credit unions require a steady job and income;
- bad debts can be sold to collection agencies;
- bad credit is not far fetched and when you get a payday loan as a form of installment loan you might wind up not being able to service the whole thing;
- some lenders (not banks or credit unions) ask you for confidential information about your online banking login when you apply. This may not be secure and is not recommended by banks because you are putting yourself at risk.
- Normally, you should not get an installment loan of this type until you repay a previous loan, but some irresponsible borrowers turn to another lender who does not check credit scores for a new cash advance and overburdens their budget with dangerous loan cycles. The formal approach of traditional financial institutions with better legal regulation results in a high percentage of loan applications for short-term installment loans going to other lenders.
