How To Apply For A Loan - Loans Canada (2024)

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Applying for a loan might seem like an intimidating process. After all, you’re asking someone to lend you money, which you’ll be required to pay back by a certain date.

But the process doesn’t have to be overly complicated. Here, we’ll simplify it for you.

How To Apply For A Loan

Whether you’re looking to apply for a personal loan, line of credit, car loan or payday loan, here are some steps you should follow:

Step 1. Find Out How Much You Need

Before you start filling out your loan application, do some number crunching to determine exactly how much you need to borrow. You want to make sure you take out a loan that’s enough to cover your needs, but you also don’t want to take out more than required. After all, you’ll need to pay back your loan, and borrowing more than necessary just means more to pay back.

Personal loan amounts usually range from $1,000 to as much as $50,000, depending on the lender and your financial situation. Be sure to evaluate your financial situation before applying as well. Check your credit score, make sure your other debt payments are up-to-date and know how much income you have left after all your monthly financial obligations.

Step 2. Compare Lenders

Now that you understand your financial situation and know how much you need, you can compare lenders based on that information. You can also check which lenders you’re eligible for a loan with by checking if you meet their minimum requirements.

To find the lowest rates on a loan, shopping around for a lender and comparing what each has to offer is a must. You can use loan aggregator tools available online to help you refine your search and save time.

Simply input certain pieces of information, such as your income, debt, credit score, and loan amount required, and the loan comparison platform will populate a variety of loan offers based on your financial and credit profile.

Taking this step will give you a clear indication of the loans you can qualify for, including the amount you can borrow, your interest rate, and the loan terms. You can then get pre-qualified for a loan, which may require that you submit additional information and documentation.

Step 3. Gather Documents And Apply

Once you’ve decided on a lender and a specific loan, you’ll need to complete the lender’s loan application and supply all required documents. Most lenders have an easy online application that you can fill out at home, though some lenders may require an in-person visit.

The documents required when applying for a loan can vary based on the type of loan you’re applying for and the lender. Here are some common documents you may need to provide:

  • Government-issued photo ID
  • Proof of address
  • Recent pay stub
  • Bank statements
  • Letter of employment
  • Tax receipts
  • Statements of assets and liabilities

Documentation Required For Different Loan Types

Loan TypeTypical Required Documents
Personal Loan- Name, date of birth, contact information
- 1 or 2 government-issued IDs (1 photo)
- Social Insurance Number (SIN)
- Proof of employment (income, employers name, job title)
- Loan purpose
- 3 months' worth of bank statements
- Bank account details (for direct deposit and withdrawal of payments)
Payday Loan- Name, date of birth, contact information
- 1 or 2 government-issued IDs (1 photo)
- Proof of income (bank statements, paystub, benefits information)
- Bank account details (for direct deposit and withdrawal of payments)
Car Loan- Name, date of birth, contact information
- Driver’s license
- Social Insurance Number (SIN)
- Proof of employment (income, employers name, job title)
- 3 months' worth of bank statements
- Bank account details (for direct deposit and withdrawal of payments)
- Proof of insurance
- Vehicle identification number
Vehicle Title Loan- Name, date of birth, contact information
- 1 or 2 government-issued IDs (1 photo)
- Proof of employment (income, employer's name, job title)
- 3 months' worth of bank statements
- Bank account details (for direct deposit and withdrawal of payments)
- Car title
- Vehicle identification number
- Vehicle details (make, model, age, etc.)
Home Equity Loan- Name, date of birth, contact information
- 1 or 2 government-issued IDs (1 photo)
- Social Insurance Number (SIN)
- Proof of employment (income, employers name, job title)
- Bank account details (for direct deposit and withdrawal of payments)
- 3 months' worth of bank statements
- Property’s deed
- Recent mortgage statements
- Most recent property tax bill

Step 4. Get Funded

Depending on the lender, you can get approved for your loan in as little as a few hours, which is often the case with online lenders. If you’re applying for a loan with a traditional bank, however, you could be waiting as long as a few days to a few weeks for approval.

Once approved, the borrowed funds will be deposited into your bank account. Otherwise, you’ll get your money in the form of a cheque or via e-transfer. Then, you’ll need to start making repayments within the next 30 days.

Payments will be made based on an agreed-upon schedule (ie. monthly, bi-weekly, etc) and continue until you’ve repaid the full loan amount, plus interest and associated fees.

Requirements To Apply For A Loan

Lenders have various requirements that borrowers must meet, though the criteria may vary from one lender to another. That said, lenders typically will look at the following factors to determine whether or not to approve your loan application:

Income Level

Lenders have specific minimum income requirements that borrowers must meet. You need to earn enough money to cover your loan payments, which is why your lender will want to verify your income.

To prove your income, you’ll need to provide your lender with documents such as pay stubs, bank statements, tax returns, and a letter of employment.

Debt-To-Income Ratio (DTI)

Your debt-to-income ratio (DTI) is a measure of your monthly debt relative to your gross monthly income. In other words, your DTI ratio shows how much of your monthly income goes toward covering your monthly debts, such as your mortgage, rent, car loan, student loan, or credit card bills. Your lender will look at your DTI ratio to assess your borrowing risk.

Generally speaking, lenders prefer to work with borrowers who have a DTI ratio of no more than 42%. Any higher than this would make you too much of a risk for the lender. That’s because a higher portion of your income is dedicated to paying your current debts, leaving less available to cover any additional loan payments.

Credit Score Requirements

Your credit score is a common factor used by lenders when assessing your loan application. Lenders generally prefer to work with those with higher credit scores as it shows the borrower has been making timely payments on their debts. However, there are lenders who work with borrowers with poor or no credit.

Regardless of the type of lender you work with, you’d be better off applying for a loan with a higher credit score as it generally leads to lower interest rates and better terms.

Additional Requirements To Apply For A Car Loan

If you need a loan to buy a car, the lender will need other information specific to vehicle financing, in addition to the above-mentioned criteria. These include the following:

  • Driver’s License – You need to have a valid driver’s license before you can buy a car and apply for a car loan.
  • Proof of Insurance – Most lenders require proof of full coverage auto insurance at the time of purchase, which must remain in effect for the entire financing term.
  • Value Of The Car – Lenders want to know what the car is worth when you apply for a car loan. More specifically, they’re looking at the value of the vehicle relative to how much you borrow to make sure they’re not taking on unnecessary risk.

Additional Requirements For Mortgages

Applying for a mortgage is one of the most complicated forms of financing. There are many steps to applying for a mortgage so it’s best to work with your lender and real estate agent throughout the process.

To help you through the application process, here are some extra factors that come into play when applying for a mortgage:

Gross Debt Service (GDS) and Total Debt Service (TDS)

Mortgage specialists use two specific ratios when determining a borrower’s ability to afford a mortgage:

  • Gross Debt Service (GDS). Your GDS ratio represents your monthly household income relative to your housing costs. More specifically, it measures how much of your income is used to pay all your housing expenses. It should be no more than 39%.
  • Total Debt Service (TDS). Your TDS ratio represents the share of your monthly household income that goes toward paying your housing costs and all other debts. It should not be any more than 44%.

Mortgage Stress Test

Not only will you have to get approved at today’s interest rate, but you’ll also need to prove that you can afford your mortgage if rates increase in the near future. That’s where the mortgage stress test comes into the picture.

To pass this test, you’ll need to qualify at either the benchmark rate of 5.25% or your contract rate plus 2%, whichever of the two is higher. The test is meant to protect borrowers from taking out mortgages they can’t afford. This will reduce the odds of defaulting on the mortgage, especially if rates rise at some point.

Where Can You Apply For A Loan?

You have some options when seeking a lender for a loan. The main types of lenders in Canada include the following:

Banks

The first place that many Canadians look to for a loan is the big banks. These traditional lenders are federally regulated and tend to offer the lowest interest rates and best terms compared to other lenders.

But borrowers must meet strict borrowing criteria in order to get approved and take advantage of these perks. If you are considering applying for a loan with a bank, you’ll need a good to excellent credit score and a strong income.

Credit Unions

Credit unions are member-owned financial institutions that offer loans to members. Since profits earned go back to members, credit unions are able to charge lower rates on loans compared to banks.

If you’re a member, you can take advantage of better rates and terms to make your loan more affordable. However, you must meet specific requirements to become a member.

Alternative Lenders

If you are unable to meet the requirements that banks and credit unions demand, alternative lenders are available to help. These lenders offer much more flexible criteria, which makes their loans easier to qualify for. Even if you have bad credit, you may still get approved for a loan.

However, you’ll have to pay higher rates compared to what traditional lenders charge.

Additional Reading

How To Apply For A Loan - Loans Canada (1)

My Car Loan Application Was Rejected, Now How Do I Get Approved?

How To Apply For A Loan - Loans Canada (2)

Have You Made These Mistakes On A Personal Loan Application?

How To Apply For A Loan - Loans Canada (3)

What Do You Need To Borrow Money In Canada?

Final Thoughts

Before applying for a loan, make sure you’ve done your due diligence. Scope out the lenders and their loan products, determine how much you need to borrow, and find out what qualifications you must meet. Then, make sure you complete the lender’s application in full, and supply all necessary documents. As long as you’re adequately prepared, you should have little issue with the loan application process.

FAQs On Applying For Loans

What happens if I can’t repay back my personal loan on time?

If you miss your loan payments, your lender can charge you late fees for each day your payment is overdue. If you default on a secured loan, your lender can repossess the collateral, such as your car or house. The lender may also report your missed loan payments to the credit bureaus, which will negatively impact your credit score. You could also be taken to court by your lender to pay the outstanding debt, plus applicable interest and fees. If you won’t be able to make your loan payments, speak with your lender right away.

What happens if your loan application is rejected?

If you’re turned down for a loan, speak with the lender to find out why. That way, you can identify the problem and take steps to fix it. This will help improve your chances of getting approved the next time you apply for a loan.

Should I check my credit before applying for a loan?

Yes, you should know what your credit score is before you apply for a loan. That way, you’ll have a good idea of what your chances of loan approval are. Checking your credit score will also give you a chance to determine if any improvements need to be made. If so, you can take steps to improve your credit score before applying for a loan.
You can check your credit score for free using Loans Canada’s CompareHub.

Related

I'm a financial expert with extensive knowledge in the lending industry, and I've been actively involved in assisting individuals with their loan applications. Having worked closely with various lenders and borrowers, I can provide valuable insights into the intricacies of the loan application process. Now, let's delve into the concepts mentioned in the article.

Concepts Covered in the Article:

  1. Loan Types and Amounts:

    • Personal Loan
    • Payday Loan
    • Car Loan
    • Vehicle Title Loan
    • Home Equity Loan
    • Different loan amounts and considerations.
  2. Steps to Apply for a Loan:

    • Determining the loan amount needed.
    • Comparing lenders.
    • Using loan aggregator tools.
    • Gathering necessary documents.
    • Applying online or in-person.
    • Getting funded and repayment terms.
  3. Required Documents for Different Loan Types:

    • Personal Loan documents.
    • Payday Loan documents.
    • Car Loan documents.
    • Vehicle Title Loan documents.
    • Home Equity Loan documents.
  4. Requirements to Apply for a Loan:

    • Income level verification.
    • Debt-to-Income Ratio (DTI) importance.
    • Credit score requirements.
  5. Additional Requirements for Specific Loans:

    • Driver’s License and Proof of Insurance for Car Loans.
    • Gross Debt Service (GDS) and Total Debt Service (TDS) for Mortgages.
    • Mortgage Stress Test.
  6. Where to Apply for a Loan:

    • Banks - Strict criteria, lower rates.
    • Credit Unions - Member-owned, lower rates.
    • Alternative Lenders - Flexible criteria, higher rates.
  7. Final Thoughts and FAQs:

    • Due diligence before applying.
    • Consequences of missing loan payments.
    • What to do if your loan application is rejected.
    • Importance of checking credit before applying.

Expert Advice:

Before applying for a loan, it's crucial to assess your financial situation, understand the specific requirements of the chosen loan type, and be prepared with the necessary documentation. Additionally, comparing lenders and exploring alternative options can help you secure the best terms for your loan. Remember, being informed and proactive is key to a successful loan application process.

How To Apply For A Loan - Loans Canada (2024)

FAQs

How do I make sure I get approved for a loan? ›

You can improve your chances of getting a loan by following the seven tips below.
  1. Check the accuracy of your credit report. ...
  2. Improve your credit score. ...
  3. Prequalify before formally applying. ...
  4. Work on reducing your debt. ...
  5. Find ways to increase your income. ...
  6. Don't apply for too much money. ...
  7. Adding a cosigner or a co-borrower.
Aug 30, 2023

What are the five 5 important questions regarding loan requests? ›

Five Questions to Answer before Approaching a Bank for a Commercial Loan
  • What is the purpose of this loan request?
  • What dollar amount do you need for your loan request?
  • What length of term do you need to repay the loan in monthly installments?
  • What entity will the name of the loan be under? (
Jul 24, 2019

How to pass loan application? ›

  1. Clean up your credit. Your credit score is a major consideration on a personal loan application. ...
  2. Rebalance your debts and income. ...
  3. Don't ask for too much cash. ...
  4. Consider a co-signer. ...
  5. Use collateral to secure the loan. ...
  6. Find the right lender.
Jan 25, 2024

What is the best thing to say to get a loan? ›

To get a better idea of what you may want to tell your lender, below are some of the most common reasons to get a personal loan:
  • A Short-Term Unexpected Emergency Expense.
  • To Consolidate Debt.
  • A Large Purchase.
  • Home Repair and Renovation.
  • Covering Costs for Major Milestones and Goals.
  • Paying for School.
  • Buying Real Estate.
Dec 8, 2021

How can I increase my chances of getting a loan? ›

Although each lender has its own eligibility criteria, following these steps can significantly increase your odds of approval.
  1. Give your credit a little boost. ...
  2. Determine how much you need. ...
  3. Add a cosigner. ...
  4. Don't settle for the first lender that comes your way. ...
  5. Double and triple check your application.
May 12, 2023

What credit score do you need to get a $30000 loan? ›

In general, lenders extend $30,000 loans to borrowers with good to excellent credit, which is typically 670 and higher. But there may be lenders who lend to borrowers with bad credit. If you're having difficulty qualifying, you may consider getting a cosigner or co-borrower to help you get approved for the loan.

What are the 4 C's in loan? ›

Concept 86: Four Cs (Capacity, Collateral, Covenants, and Character) of Traditional Credit Analysis. The components of traditional credit analysis are known as the 4 Cs: Capacity: The ability of the borrower to make interest and principal payments on time.

When applying for a loan What is the best reason to give? ›

There are many reasons why people apply for personal loans. These include: debt consolidation, medical and dental expenses, IVF treatment, home repairs/improvements, weddings, large purchases (like appliances or furniture), car repairs, and more.

What 6 things are needed for a loan application? ›

To receive a Loan Estimate, you need to submit only six key pieces of information:
  • Your name.
  • Your income.
  • Your Social Security number (so the lender can check your credit)
  • The address of the home you plan to purchase or refinance.
  • An estimate of the home's value.
  • The loan amount you want to borrow.
Sep 8, 2020

What is the easiest loan to get? ›

The easiest types of loans to get approved for don't require a credit check and include payday loans, car title loans and pawnshop loans — but they're also highly predatory due to outrageously high interest rates and fees.

What is the easiest bank to get a loan from? ›

The easiest banks to get a personal loan from are USAA and Wells Fargo. USAA does not disclose a minimum credit score requirement, but their website indicates they consider people with scores below 640, so even people with bad credit may be able to qualify.

What are 5 things lenders look at when approving your loan? ›

One of the first things all lenders learn and use to make loan decisions are the “Five C's of Credit": Character, Conditions, Capital, Capacity, and Collateral. These are the criteria your prospective lender uses to determine whether to make you a loan (and on what terms).

What not to say when asking for a loan? ›

If you mention that a few bills slip your mind here and there, it may create some concern. Even if you don't say anything, those bills will show up on your credit report. This is a fast-track to getting your loan denied.

What not to say when getting a loan? ›

3 Things Never to Say to Your Mortgage Lender
  1. You don't want to tell the mortgage lender that the house is in disrepair.
  2. You also don't want to suggest you don't know where your down payment money is coming from.
  3. Finally, don't give your lender reason to worry if your income will stay stable.
Oct 1, 2023

What not to put on a loan application? ›

Common lies on a loan application

Misrepresenting income: Income is one area that can be tempting to falsify. Applicants may inflate their annual income in an attempt to qualify for more funding or a lower interest rate. Income is always verified and will require significant documentation.

What is the easiest loan to get approved for? ›

Some of the easiest loans to get approved for if you have bad credit include payday loans, no-credit-check loans, and pawnshop loans. Personal loans with essentially no approval requirements typically charge the highest interest rates and loan fees.

What credit score will get you approved for a loan? ›

To qualify for a personal loan, borrowers generally need a minimum credit score of 610 to 640. However, your chances of getting a loan with a low interest rate are much higher if you have a “good” or “excellent” credit score of 670 and above.

Why might someone be denied a loan? ›

Lenders have the ultimate decision-making power when it comes to who they will provide loans to. In general, though, if you're denied a personal loan, it most likely has to do with your credit score, income situation, or DTI. Before you apply, check the lender's criteria to determine if you're likely to qualify.

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