All You Need To Know About Different Types Of Loans Available In Canada
Do you want to take a loan but know nothing about it? If you are curious about various types of loans and which one is the best for you, keep reading.
Are you looking for your dream car or your future home but falling short of funds? This is when loans come to your rescue!
If you have been wondering about the loans in Canada, how do they work, which one should you get, you have arrived at the right place.
Since there are various types of loans available in Canada, it is crucial to do your homework before making your final decision. This article will explore the different forms of loans in Canada to see which one will work the best for you and your unique needs.
What is a Loan?
To quickly introduce, a loan is when you borrow money from a friend, a bank, or another financial institution in return for repayment of the principal plus interest in the future. It has these integral components which include-
- Principal: The principal is the amount borrowed and needs to be repaid with interest.
- Interest: Interest is the fee you pay to get the loan.
Loans are usually of two types- Secured Loans, and Unsecured Loans
1. Secured Loans
A secured loan is one in which the borrower pledges an asset (such as a vehicle, boat, or a house) as collateral, which means the lender will take possession of that property if the borrower defaults or fails to repay the loan.
2. Unsecured Loans
The lender or a bank approves unsecured loans at a higher interest rate where the borrower is not required to provide any collateral or security against the loan. In case the borrower is unable to pay off the unsecured loan, the lender does not have the legal right to sell off the borrower’s private belongings to recover the principal amount.
Now that we have learned about the basics of a loan, we can discuss the several types of loans available in Canada.
This article has been divided into two parts to make it easier for you to understand. Personal loans are covered in the first segment, while business loans are covered in the second.
Personal Secured Loans
What is a Personal Secured Loan?
A personal secured loan requires collateral. Most Lenders need a home as collateral for a personal secured loan; however, some lenders may allow you to use other properties as collateral, such as a vehicle.
Purpose of taking
This type of loan is usually taken to consolidate debt and cover any unexpected expenses.
Personal Unsecured Loans
What is a Personal Unsecured Loan?
A personal unsecured loan is not backed by an asset. The lender can choose not to run a credit check at all. Personal unsecured loans have a higher interest rate, due to their riskier nature. They are usually taken for smaller amounts ranging from $100 to $500.
Purpose of Taking
These types of loans are usually taken for short emergency expenses like a car repair or roof repair.
What is a Mortgage?
A mortgage is a loan to buy real estate or properties. Here, the property becomes the collateral and is used as security towards the loan. A mortgage has a term as well as an amortization.
The amortization period defines the time you must pay off the mortgage. The mortgage term is the time you hold the mortgage with a lender. The most common mortgage term in Canada is five years, but you can get a mortgage for as little as one year or as much as ten years.
Purpose of Taking
Mortgages are usually taken for the purpose of purchasing real estate like a primary home, rental properties, or investment properties of any kind. Mortgages are also taken in case of purchasing vehicles.
Segment 2 – Business Loans
What is a Business Loan?
In a business loan, you borrow money for your business, and you repay the lender in installments within a stipulated repayment term. If your company is a startup with little or no assets, the lender may ask you to secure the loan with personal assets such as your home and car.
Purpose of Taking
This type of loan is taken for the purpose of funding the startup of a company, growth, or the fulfillment of purchase orders.
What is Equipment Financing?
Equipment financing is a form of financing that assists a company in purchasing the equipment it requires. Purchasing equipment is costly for any company. If your company is expanding, you could reinvest your profits by taking out a loan to purchase the equipment it requires.
Purpose of Taking
This type of loan is used to buy equipment for a business starting up and expanding.
What is an Agriculture and Farming Loan?
It can be difficult to obtain the financing you need to begin a farm, purchase machinery, or look to expand one. Fortunately, there are loans built specifically for this purpose. This type of loan is available to help today’s busy farmers fulfill their financial obligations.
Purpose of Taking
This type of loan is taken for establishing, improving, and developing farms.
Exploring various specialized loans will allow you to choose the best one for yourself. Once you know which one to go for, you can then scout amongst the various banks and financial institutions for the best terms and interest rates.
The above-listed loans are a helpful guide for any investor looking to invest in loans in Canada.
