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What is an instalment loan?

Posted on 10 September 2023

Written by Graeme Hamilton

In Canada, financial flexibility is essential for many individuals and businesses to manage expenses, whether for personal reasons, education, or starting a new venture. In fact, according to Statistics Canada, one in four Canadians say they are unable to cover an unexpected expense of $500. Instalment loans are a popular financial tool that many Canadians use to navigate their financial needs. They can help to ease the pressure of financial stress when you are facing unexpected bills. In this article, we will delve into what an instalment loan is, how it works, and what you should consider before applying for one in Canada.

What is an instalment loan?

An instalment loan is a type of personal loan that allows borrowers to access a lump sum of money upfront and repay it in fixed, equal payments over a specified period. These loans are often used for a wide range of reasons, including buying a car, financing a home renovation, covering medical expenses, or consolidating debt. What makes instalment loans different from other forms of credit is the predictable and structured repayment schedule. They have a scheduled end date, so you know that you are working towards having the loan repaid in full. Payments will include interest, and sometimes fees, and are typically monthly. There are four primary types of instalment loan:

  • Mortgages – used for buying property, with terms usually lasting between 15 – 30 years. You can choose from fixed or variable interest rates
  • Car loans – used for buying vehicles. Interest rates usually range from between 3 – 15%
  • Student loans – used for covering educational costs, available from both the government and private lenders
  • Personal loans – used for any kind of expense, and commonly for consolidating debts. Personal loans can be secured or unsecured, depending on your credit score

Where can you get an instalment loan?

There are a few places you can get an instalment loan in Canada:

  • Banks – if you have good credit, they may have low interest options
  • Credit unions – often, credit unions have even better interest rates than banks. You will need to become a member of the credit union in order to take on products
  • Online lenders – online lenders are a good option if you do not have the best credit score and you are in need of funds fast

How do instalment loans work in Canada?

Here is the typical process for receiving an instalment loan in Canada:

  • Specify a loan amount. When you apply for an instalment loan, you will need to specify the amount you want. Your lender will assess your creditworthiness and determine whether or not you meet their eligibility criteria for the full amount requested
  • Repayment term. The next step is agreeing a repayment term over which you need to repay the loan. Typically, this ranges from one to five years.
  • Interest rate. When browsing for instalment loans, make sure to try and secure the best interest rate you can – they can be either fixed or variable rates. Interest rates will depend on your credit score and the amount of loan requested
  • Loan approval process. Lenders will look at your credit history, income, and debt to income ratio to see if you meet the criteria for an instalment loan. Having a good credit score and a stable source of income will work in your favour
  • Monthly payments. If accepted, you will then make regular, fixed monthly payments for the repayment term until the loan is repaid in full. This will include both the principal amount borrowed, and the interest rate on the balance

What are the benefits of an instalment loan? 

Here are the advantages of an instalment loan:

  • Predictable monthly payments – you can budget accordingly, and having a fixed interest rate means you do not need to worry about increases
  • Large loan amounts – compared with credit cards or payday loans, instalment loans allow you to borrow more
  • Debt consolidation – instalment loan can consolidate multiple high interest debts into a single, manageable payment at a lower interest rate
  • Improved credit score – by making your payments on time and in full, you could see a positive increase in your credit score
  • Quick access to funds – lenders often release funds within a day or less once you have been approved
  • Flexible payment terms – you have flexibility and freedom to decide the loan term that works for you
  • Relaxed eligibility – it is relatively straightforward to qualify for an instalment loan in Canada with a reputable lender

What to consider before applying for an instalment loan

Before you apply for an instalment loan in Canada, you should think about the following:

  • Understanding the interest rate and ensuring it fits with your financial goals
  • Ensuring the loan term fits your financial capabilities – while longer terms mean lower monthly payments, it does mean more interest overall too
  • Beware of any fees or penalties associated with the loan, for example, late fees
  • Assess how you measure against the eligibility criteria to see if there is anything you may need to address before applying
  • Clearly define the purpose of your loan and only borrow what you need so that you avoid unnecessary debt
  • Tracking your spending so that you can identify areas for improvement
  • Following the 50/20/30 rule – allocating 50% of your income towards essential costs, 20% for financial goals, and 30% for leisure
  • Setting up automatic transfers so that your loan repayments are covered as soon as you are paid

While instalment loans are important in helping Canadians to manage their financial requirements for different purposes, it is essential to research and choose the right instalment loan for you. It should align with your goals and capabilities, from eligibility criteria interest rate. By borrowing reponsibly and keeping current on any payments you owe, instalment loans can be a helpful tool for meeting your financial goals.

If you have further questions on instalment loans and borrowing responsibly, book a free consultation with a reputable Licensed Insolvency Trustee at Spergel. If you are struggling to meet your financial requirements, have unmanageable debts, or simply do not know where to turn, we are here to help you. We will review your financial circumstances and advise you on the best forms of debt relief for your situation.

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Graeme Hamilton

Graeme Hamilton is a Chartered Insolvency and Restructuring Professional with over 10 years’ experience as an LIT (Licensed Insolvency Trustee). He is also Spergel's resident expert on bankruptcy and debt relief in the Ontario region. Prior to establishing his career in the insolvency industry, Graeme lived in Cambodia doing volunteer work with NGO's.

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