If you’re like most people, there’s a good chance you’ll need to borrow money at some time in your life. You might be buying a home, buying a car, or just trying to pay the bills.
Would you like the security of knowing how much you’ll need to pay each month and when your loan payments will end? Then an installment loan is probably a good choice for you.
With an installment loan in Canada, you and your lender agree in advance on the interest rate, amount, and frequency of each payment. These usually stay the same for the duration of the loan. Once you’ve made all the payments (called “installments”), your loan is fully paid off.
- What is an installment loan?
- Types of installment loans
- Pros and cons of installment loans
- How to apply for an installment loan
- FAQ
What is an installment loan?
An installment loan is a type of debt where the amount you borrow, the payment frequency, the payment amounts, the end date, and usually the interest rate are pre-determined. Chances are that most personal loans you get are an installment loan.
This differs from a line of credit or a credit card, where you have the flexibility to decide how much and when to pay, subject to a minimum.
You can apply for installment loans online through resources like LoanConnect (which compare several loans for you) or directly from the lenders.
Learn more about LoanConnect here:
LoanConnect is a Canadian loan search engine that can connect you with an unsecured personal loan in minutes. With 12 types of loans available and interest rates starting at only 8.99%, you can compare your options without taking a hit to your credit score.
- Free to use
- Loans available for all credit scores
- 12 different types of loans to search for
- Interest rates as low as 8.99%
- Loans available from $500 to $60,000
- No effect on your credit score
- Available to all of Canada
- Make sure to pay attention to the interest rate
- Potential for bias in search results
- Limited amount of lenders compared
- Canadian citizen
- Age of majority
- Loans available for all credit scores
- Compares several different lenders
Types of installment loans
People take out installment loans for many reasons, so they come in many different forms.
Here are some common ones:
Car loan
A car loan, as you may have guessed, is taken out when buying a new or used car.
They’re secured by the value of the car, which means the car can be repossessed if you don’t pay your loan. This also means you can get pretty decently low interest rates on your car loans.
The main way to get a car loan is directly from the dealer when you buy your car. But if you love to save money, it could be worth it to do a bit of haggling by researching other places to get your loan with lower interest rates.
Mortgage
Probably one of the largest loans you’ll have, a mortgage is also a type of installment loan, in this case secured by your home.
Though mortgages are on a much larger scale than other types of installment loans, they work the same way. The main difference is your full mortgage is usually split up into 5 or 10 year sections, each of which could have their own payment and interest terms.
Student loan
A student loan is taken out to finance your education, whether by directly paying your tuition, or paying for anything else you need to survive during school.
Though it’s usually unsecured, it’s also guaranteed by the government – allowing decently low interest rates that are paused while you’re in school.
Student loans are definitely not well loved, but they are a good way to invest in your future while also building your credit history early.
Buy now, pay later loans
Buy now, pay later loans are what you might see advertised by furniture stores or department stores.
They often have low interest rates (sometimes as low as 0%), but it’s important to beware of administration charges. If you miss a payment, you’ll likely be heavily penalized and made to pay all deferred interest at once.
Payday loans
Payday loans are short term loans, usually to be paid back within a few weeks.
When you consider the short duration of the loan and the administration charges, the effective annual percentage rate (APR) can be in the hundreds.
Obviously, these are best avoided at all costs.
Personal loans
Personal loans are the catch-all for installment loans that are taken out for general purposes, such as debt consolidation or short term needs.
They can be secured or unsecured and you can get these from an online lender or a traditional bank.
Pros and cons of installment loans
Like other forms of borrowing, installment loans in Canada have their pros and cons.
Here are some of the main ones:
| Installment loans | |
|---|---|
| Pros | * Predictable payment schedule * Easy to shop around and apply * Making payments can increase your credit score |
| Cons | * Can have a high interest rate * Can encourage overspending * Little flexibility once payments start |
Let’s take a look at each a bit closer.
The pros of installment loans
Compared to other types of borrowing (like a credit card or line of credit), installment loans have some advantages.
Installment loans have a predetermined payment amount and end date
The interest rate, number and frequency of payments, and the payment amount will be spelled out when you get the loan and will usually stay the same for the duration (except for mortgages).
That means you know in advance when the loan will be fully paid off, as long as you make all the payments on time. You can also easily account for the payments in your monthly budget.
It’s easy to shop around for an installment loan
You can easily apply for installment loans online or by going directly to your main bank.
Just keep in mind that to always ask about extra fees that may be involved, as well as making sure you’re going with the best interest rate available to you.
Paying off an installment loan can improve your credit history
It’s relatively easy to get an installment loan secured by an asset such as a car or home, as long as you meet the income requirement. This means that there may be an opportunity to get an installment loan for bad credit.
And paying off an installment loan on time can actually increase your credit score, opening you up for more (and better) credit products in the future.
For young people especially, a student loan (or student credit card) can be a good way to build up your credit history.
The cons of installment loans
Like any type of debt though, there are things to watch out for.
Interest rates on installment loans can be high
The interest rate on your loan depends on many factors including:
- Your credit history
- The purpose of the loan
- Whether the loan is secured or unsecured
The maximum annual percentage rate (APR) for a loan in Canada is 60%, and payday loans can be even higher. This can cause your total payments to be many times more than the original loan amount, so it’s good to calculate your total loan amount, including interest, to get the full picture.
To do so, feel free to play with our loan calculator below:
Loan Values
Installment loans make it easy to over-borrow and spend
When you can get furniture for no money down, or a car for a few hundred dollars a month, it’s very tempting.
But you should think about your needs and wants…is this something you can really afford?
You usually don’t have much flexibility, once your loan starts
An installment loan requires payments to be made on a predetermined schedule. In fact, usually pre-authorized withdrawals are set up from your bank account.
You can’t skip payments if you’re short of cash, and you usually can’t pay off the loan early. Make sure you understand the loan contract before you agree to it.
How to apply for an installment loan
Your ability to get a loan, the amount you qualify for, and the interest rate are influenced by many factors. For example your income, assets (for a secured loan especially), and your credit score will be taken into account.
Each lender has different criteria though, so it pays to try a few different sources. These are some of the main options you’ll have.
Apply through your bank
If you have a good relationship and history with your primary bank, it makes sense to try them first. You can usually apply for installment loans online, through their call centre, or in person at your branch.
This is likely the path that most people will be most comfortable with, since you already have a relationship with the bank and the trust that comes with it.
That said, it’s still important to at least check out your other options to see if you can get a better deal. And even if you do end up going with your bank, you at least know the exact price of your comfort (which may be completely worth it for you).
Apply through a loan comparison tool
Online loan comparison sites are an easy way to send your loan request out to multiple lenders at the same time. They make it convenient to get offers and compare the results to find the loan that works best for you.
As shown before, an example of a loan comparison tool for Canada is LoanConnect:
LoanConnect is a Canadian loan search engine that can connect you with an unsecured personal loan in minutes. With 12 types of loans available and interest rates starting at only 8.99%, you can compare your options without taking a hit to your credit score.
- Free to use
- Loans available for all credit scores
- 12 different types of loans to search for
- Interest rates as low as 8.99%
- Loans available from $500 to $60,000
- No effect on your credit score
- Available to all of Canada
- Make sure to pay attention to the interest rate
- Potential for bias in search results
- Limited amount of lenders compared
- Canadian citizen
- Age of majority
- Loans available for all credit scores
- Compares several different lenders
Apply for an online installment loan
You can also apply directly to a lender through their online website. This makes sense if you have a particular lender in mind.
As an example, Mogo offers loans of up to $35,000 online. In most cases, they approve or decline your loan within 3 minutes. They also tell you what your credit score is, for free.
Learn more here:
Need a hand on an upcoming expense that you just don't have the cash available for? A MogoMoney loan can offer you an easy way to get approved 100% online – plus get free access to your credit score while you're at it. Just note interest rates can go as high as 34.37%.
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- Very high interest rate of 34.37%
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- On-time payments give you access to higher loan amounts
$50 GeniusCash + Take out your loan for a 100-day test drive + Get pre-approved in 3 minutes.What about you?
Installment loans are good for people who need the discipline of a fixed payment schedule. They’re also good if you want to know ahead of time how long it will take to pay off your loan.
But if you think you’ll want to skip a payment, or even pay off your loan early, they might not give you the flexibility you need. Like with any contract, it’s good to read the fine print.
What do you think?
Have you taken out an installment loan? Was it a good or bad experience?
Let us know in the comments below.
FAQ
What is an installment loan?
An installment loan is when you borrow a sum of money, then pay it back on a predetermined payment schedule. Usually each payment is for the same amount and the payments are equally spaced apart (weekly, monthly, etc). Some examples of installment loans are mortgages, car loans, student loans, and personal loans.
What are the pros of installment loans?
Installment loans are quick and easy to apply for, so they’re a convenient source of money when you need it in a hurry. They have a pre-set schedule of payment amounts and dates, which is good for people who need that sort of discipline. Read more pros here.
What are the cons of installment loans?
The payment dates and amounts are determined at the beginning of the loan and usually can’t be changed. If you want the flexibility to pay your loan off early without penalty, a line of credit might be a better option. Read more cons here.
Should I get an installment loan?
If you need money to finance your education or to buy a home or a car, you’ll probably need to take out an installment loan. Just be sure you understand the terms of the loan and will have the ability to make the payments.
How do I apply for an installment loan?
It’s quick and easy to apply for installment loans online, whether it’s through an online lender or a loan comparison site. You can also arrange a loan with a traditional bank – online, over the phone, or in person.
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