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FINANCIALLY AESTHETIC · GUIDE 17/37
STUDENT, AUTO & PERSONAL LOANS: COMPARE BEFORE SIGNING
FA-3.4 · Debt & Borrowing
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THE COST QUESTION
Loans with the same monthly payment can have wildly different terms, fees and total costs.
Personal Loans: Understanding the Terms
Personal loans allow you to borrow a fixed amount of money and repay it over a certain period. Lenders may also refer to them as long term financing plans, installment loans, and consumer loans.
You must repay the entire amount, including interest and any applicable charges. You make regular payments, known as installment payments.
You can use personal loans for specific expenses such as home renovations, furniture, or a car. You can also use them to consolidate other debts with higher interest rates. Most personal loans range from $100 to $50,000 and have terms of 6 to 60 months.
Personal loans are offered by lenders such as banks and credit unions. Your lender may offer to lend you more than you need. Be careful and don’t borrow more than you can afford.
Before executing a personal loan contract, make sure you fully understand the terms. Ask the lender questions if there is anything you do not understand.
Federally regulated lenders, such as banks, must provide you with the following information when you take out a personal loan:
- the loan amount
- the interest rate, and whether it is fixed or variable
- the loan term
- the amount of the payments
- other charges and service charges
- any optional services you have agreed to
Other lenders, such as some credit unions, are regulated by provincial or territorial authorities. They may not be required to provide this information. Contact your provincial or territorial consumer information office to learn more about borrowing regulations.
Guaranteed and Unsecured Loans: The Role of Collateral
A secured personal loan uses an asset, such as your car, as collateral. This serves as a promise to your lender that you will repay the loan. If you cannot make your payments, the lender can take the asset from you.
There are different types of guaranteed loans, such as:
- guaranteed personal loans
- title loans
- pawnshop loans
An unsecured personal loan is a loan that does not require collateral. If you miss your payments, your lender can sue you. They also have other options, such as withdrawing cash from your account.
The Total Cost: What You Really Need to Compare
Borrowing money through a personal loan can be very expensive. Be sure to consider the interest rate, fees, and loan term.
When you take out a personal loan, your lender gives you an estimate of your regular amount of payment. To arrive at this amount, the lender calculates the total cost of the loan. The lender then divides this amount by the number of payments over the loan term.
The total cost of the loan includes:
- the loan amount
- interest on the loan
- all other applicable charges
Make sure you understand the total cost of a loan before making a decision. Multiply the amount of payment by the number of payments in your term.
For example, suppose you want to take out a $2,000 personal loan. The interest rate is 19.99% on a monthly payment plan. The following example shows the total cost of a loan for different terms.
| Option | Monthly Payment | Loan Term | Total Cost of Loan |
| 1 | $185 | 12 | $2,220 |
| 2 | $75 | 36 | $2,700 |
| 3 | $53 | 60 | $3,180 |
Table 1: Example of the total cost of a personal loan based on different terms
This example shows that the longer it takes you to repay your loan, the more it will cost.
The interest rate on a personal loan affects the total cost of the loan. By law, lenders cannot charge more than 35% interest annually. This includes all fees, costs, and interest you will pay to obtain the loan.
Suppose you want to take out a $2,000 personal loan over 36 months. The following example shows the total cost of the loan based on different interest rates.
| Option | Interest Rate | Monthly Payment | Total Cost of the Loan |
| 1 | 8.99% | $64 | $2,304 |
| 2 | 19.99% | $75 | $2,700 |
| 3 | 34.99% | $92 | $3,312 |
Table 2: Interest on a Personal Loan
This example shows that a higher interest rate can significantly increase the total cost of your personal loan.
The interest rate a lender offers you may vary depending on:
- your credit history
- the type of lender
- the type of loan (guaranteed or unsecured)
With a personal loan, you agree to make regular payments. Lenders may allow you to make additional payments to repay your loan faster. They may also allow you to repay your loan before the end of the term without a penalty. Some lenders may charge fees if you repay your loan early.
You may also be able to renegotiate the terms of your personal loan agreement with your lender. This can help you manage your budget if your financial situation changes. Fees may apply for this service.
Auto Loans: Compare Offers Before Signing
If you’re considering taking out an auto loan, make sure you understand the terms of the loan. Get quotes from several dealerships and lenders. You could save money by securing a lower interest rate. You may also be able to negotiate other charges, such as the dealership’s administrative fee.
You’ll need to sign an application for the dealer to provide you with approvals and a price. Don’t sign any other documents - such as a car sales contract - until you’ve made your final decision.
When comparing different auto loans, look at all the details, including:
- the interest rate
- the payment schedule
- financing cost
- the total amount you’re financing
- the loan term for an auto loan
The term of your auto loan can have a significant impact on your payments and the total cost of the car. The longer the loan term, the lower your payments will be. You’ll end up paying more interest with a longer loan term.
When budgeting for a car, keep the total price of the car in mind. The following example shows the total price of a car based on different auto loan terms.
| Car Price | Loan Interest Rate | Loan Term (months) | Total Cost of the Car |
| $25,000 | 5% | 36 | $26,974 |
| $25,000 | 5% | 84 | $29,681 |
Table 1: Example of the total cost of a car with different loan terms
Dealerships and lenders may tell you that you can lower your auto loan payments to fit your budget. Keep in mind that this usually means extending the term of your auto loan. You could end up paying more interest in the long run.
A dealer isn’t required to offer you the lowest interest rate when presenting you with different financing options. Ask the dealer to show you several offers from different lenders, if possible. Compare them to see who offers the lowest interest rate.
You might be able to get a lower interest rate directly from a financial institution or another dealership. Shop around and negotiate to make sure you’re getting the best deal.
Before Executing a Car Loan Contract
In most provinces and territories, there is no “cooling-off” period for auto loans and leases. A cooling-off period means you can cancel the contract without penalty for a specific period of time. Check with your provincial or territorial consumer information office to see if there is a cooling-off period.
Make sure you’re ready to buy a car before executing a contract. As a general rule, once you execute the contract, you must abide by its terms. Never execute a contract with more than one dealer at the same time. You may not be able to get out of either contract once they’re executed.
Dealers may ask you for a deposit to reserve or order the car you want. They may keep part or all of your deposit if you decide not to buy the car.
Specific Risks of Auto Financing
Cars lose value quickly. Your new car loses value the moment you drive it off the lot. It continues to lose value over time.
After 1 year, your new car may be worth 25% less than the price you paid. Over the next 4 years, your new car will typically lose 15% to 25% of its value each year.
You have “negative equity” when your car is worth less than the amount you owe on your auto loan.
If you have to sell your car quickly, you could lose money - for example, if your car is worth less than the balance on your loan. You may have to borrow money to cover the difference.
You could be in an accident where your car is a total loss. The payout from your insurance company may not cover the balance of your auto loan.
You may also end up paying more if you trade in your car to buy a new one. You may have to borrow money to pay for the new car and repay the balance of your loan. In this situation, you could end up with a larger loan and more interest to pay.
Long-term auto loans have terms of 72 months (6 years) or longer. They can allow you to have lower monthly payments for your car, but be aware of the risks.
The total cost of your car will be higher if you choose a long-term auto loan. This is because of the interest you pay over the life of the loan.
| Car Price | Loan Interest Rate | Loan Term (months) | Total Interest Paid | Cost of Car with Interest |
| $25,000 | 5% | 36 | $1,974 | $26,974 |
| $25,000 | 5% | 84 | $4,681 | $29,681 |
Table 2: Example of Interest Paid on Loans with Different Terms
In this example, you would pay more than double in interest with a long-term auto loan. The total cost of the car would be $2,707 higher.
Keep these tips in mind to reduce the risks associated with car financing:
- Buy a car that fits your budget
- Choose the loan with the shortest possible term based on your budget
- If possible, make a down payment
- Consider both new and used car options
- Think about how your needs might change in the future. For example, you might have children someday and need a larger car
- Avoid trading in your car if you have negative equity
Student Loans: A Different Ballgame
Student loans cannot be compared term-for-term with personal loans or auto loans: they follow their own rules, particularly regarding when repayment begins and how interest is calculated.
Six months after you finish your studies, you’ll need to start repaying your student loan.
Once you’ve completed your studies, repayment will begin after a 6-month grace period. At that point, you’ll have several payment options to consider:
- interest rate;
- increasing or decreasing your monthly payment;
- the date and frequency of payments;
- updating your banking information.
Interest on a Student Loan
No accumulated interest on Canadian student loans. You must repay any accrued interest on your loan by April 1, 2021.
If your loan includes a provincial component, interest may still apply.
Contact your province or territory for information about your interest rate, or visit the National Student Loans Service Center (NSLSC).
Adjusting Your Payments
If you have a full-time student loan, you can customize your payments online using your NSLSC account.
You can:
- increase your payments, which will shorten the time it takes to repay your loan;
- reduce your payments to make them more affordable;
- extend your repayment period up to 174 months to lower your payments.
Note: Some provinces still charge interest. By reducing your payments or extending your repayment period, you will pay more interest on your loan.
Part-time student borrowers who want to change their monthly payment can contact the CSNPE.
If you need additional help repaying your loan, you may be eligible for the Repayment Assistance Program.
The easiest way to avoid missing a payment is to set up preauthorized monthly payments that will be automatically debited from your account. Log in to your secure CSNPE account to update your banking information.
If you have not set up preauthorized payments, you must make other arrangements to pay your loan.
There are other ways to make payments. You can make additional payments at any time.
If You’re Having Trouble Repaying
If you’re having trouble repaying your loan, your options include repayment assistance or a reduction in your monthly payments. Missing payments will affect your credit report.
If you miss 9 months of payments, the federal portion of your student loan is transferred to the Canada Revenue Agency (CRA) for collections. Once your loan is in collections, you are no longer eligible for student financial aid. To become eligible for student financial aid again, you must bring your loan back into good standing.
To bring your loan back into good standing, you can choose one of the following options, if applicable:
1\. Repay all outstanding interest on your loan and make the equivalent of 4 monthly payments;
2\. Add all missed payments for interest to your loan balance - this option can only be used once - and make the equivalent of 4 monthly payments.
This chapter does not force a misleading “same amount, same term” comparison between student loans, auto loans, and personal loans: their rules, collateral requirements, interest rates, and terms are not interchangeable. The most useful comparison remains that of the actual costs and terms of each offer.
What to Check Before Signing, Regardless of the Loan Type
As a general rule, lenders require proof that you have:
- a steady income
- a bank account
- a permanent address
Most lenders run a credit check when you apply for a personal loan. Your credit report helps them assess your ability to repay a loan. They will likely consider your debts as well. Your credit report, credit score, and debts can affect your borrowing options - for example, the interest rate and type of loan for which you qualify.
You are not required to purchase loan insurance with a personal loan. Your lender may offer optional credit insurance for your personal loan.
If you have a complaint about your personal loan, contact your lender. All federally regulated financial institutions, such as banks, must have a complaint-handling procedure.
If your lender is not federally regulated, contact the regulatory agency in your province or territory.
BEFORE YOU SIGN
Get comparable written offers and read the amount financed, term, APR, collateral and early-repayment rules.
CURRENT-RULES CHECK
Legal protections, tax rates, reporting duties, deadlines and product rules change by country and over time. Use the jurisdiction labels in this guide and check the linked official source before acting.
- Prêts personnels - Canada.ca - https://www.canada.ca/fr/agence-consommation-matiere-financiere/services/prets/prets-personnels.html
- CFPB - Compare auto-loan offers - United States - auto-loan comparison.
- CFPB - Choose a student loan - United States - student-loan comparison.
- CFPB - Interest rate versus APR - United States - borrowing-cost terminology.
