Comparing Short-Term Loan Options in Canada

Types of Short-Term Loans 

If you’re looking into quick personal loans, low-interest options, or payday loan alternatives, you’ll want to have a look at the types of short-term loans in Canada available below:

Payday Loans 

According to recent statistics, approximately 2 million Canadians utilize payday loans each year. Additionally, about 5% Canadians have used a payday loan service at some point in time. You can simply apply for most payday loans online or in person, with approximately 1,400 payday locations across Canada. They are relatively easy to get with streamlined approval process processes. 

You will need government identification that proves you are at least the age of majority in your province. You’ll also need proof of permanent residency, a steady income, and an active bank account. Additionally, payday loans often do not require credit checks, making them attractive to individuals with poor or bad credit. 

However, Payday loans can carry incredibly high interest rates, and usually lenders only offer loans of between $100 and $1,500. Payment terms are often also much shorter, with individuals only having 14 to 30 days to repay. 

Short-Term Installment Loans

Besides payday loans, short-term installment loans from a bank are the most popular for those needing fast money. With these types of loans, your total sum, including interest, is divided into separate installments. It will be your responsibility to pay off these installments periodically over a period of one to two years, until your plan is fully paid off. The amount offered for these loans can vary significantly, typically ranging from $500 to $5,000. 

Additionally, eligibility requirements for these types of short-term loans can vary more significantly than those for payday loans. However, standard requirements such as identification, proof of age, income, and a bank account are typically still necessary. 

What differs the most is that with short-term installment loans, you may need to undergo a credit check with a score of 600 or higher. You may also need to prove a minimum monthly income of $1,200 or more. Short-term installment loans also differ from payday loans and title loans in that they offer lower interest rates and are more affordable in the long run. 

Title Loans

Another less common type of short-term loan option is a title loan. With title loans, unlike payday or short-term installment loans, you have to have a vehicle as collateral. A lender will hold your car’s title temporarily while you repay a loan. These loans typically provide between a few thousand dollars and up to 50% of the car’s value. 

Often, title loans are approved more quickly, and you may not require a strong credit history since the loan is secured. However, getting a title loan can be complex. You’ll need to have a proof of address, a valid ID, proof of vehicle ownership, proof of income, vehicle insurance, and have your vehicle’s condition and value evaluated. 

Additionally, most lenders require the amount you borrow to be paid back within three months to three years. It’s also important to know that different provinces have varying rules and regulations surrounding title loan lenders.

Risks and Benefits of Short-Term Loans

Like other loan types, short-term loans in Canada have both benefits and risks. Below, we’ve briefly touched on both to give you a look at the big picture before you make a decision: 

The Benefits

Application Process Is Fast

Short-term loans in Canada usually have a much faster application process. For most, this means funds are made available quickly, either instantly or in a matter of days. This is convenient for those who need funds for emergencies. It’s also convenient that applications can be done online for most lenders. 

Bad Credit Scores Are Considered

With traditional financing, those with bad credit find it harder or impossible to secure funding. On the other hand, with short-term loans, bad credit isn’t as much of a factor. Many lenders will offer funds to those with less-than-stellar credit scores if they can prove income and current financial stability.

No Lengthy Financial Obligations

Short-term loans allow you to pay off your debt quickly. Often, you can pay off what you owe within three months, which differs from long-term financial obligations. For most people, this prevents ongoing interest from increasing and reduces long-term financial stress. 

The Risks

High Interest Rates

Unfortunately, short-term loans come with higher interest rates. Also, rates are higher because you have a much shorter period of time to pay them off, so lenders are compensating for the perceived risk.

Debt Cycle Risk

Repeated borrowing of short-term loans can lead to financial difficulties because it creates a cycle of debt that becomes difficult to break. If you use short-term loans as a type of revolving source of credit, falling behind on repayments can be easy. This leads to you owing more than you can afford, and the cycle repeats when you take out another loan. 

Low Loan Amounts

One of the most significant disadvantages of short-term loan options is that you’re usually offered low loan amounts. Title loans aside, payday loans and short-term installment loans typically provide only a couple of hundred to a few thousand dollars. For many, this can be too little, especially for emergencies and business needs. 

Safer Alternatives 

Not everyone wants to take out a short-term loan if there are other options in Canada. Below, we’ve shared a few payday loan alternatives that you might want to consider: 

1. Merchant Cash Advance: If you need funds for your business between $10,000 and $30,000 and require it quickly, a merchant cash advance is a better alternative. This form of financing, offered through companies like Bizfund, allows you to borrow and repay with future debit or credit card sales. 
2. Bank Overdraft: If you are on good terms with your bank and your credit score allows it, you could get a bank overdraft. This can act as a safety net for short-term cash flow gaps. Often this service comes with an interest-free period, but interest rates can be high. 
3. Credit Union Loan (PAL): In Canada, credit unions offer ‘Payday Alternative Loans.’ These loans have a federal interest cap of about 28% and reasonable terms. Since these loans have inclusive membership criteria, they can be a good option for anyone with poor credit. 

How to Choose

Choosing between traditional short-term loans in Canada, such as payday loans, short-term installment loans, and title loans, or alternatives can be challenging. That’s why it’s best to consider your financial needs first. Then, your repayment ability and how quickly you need access to funds. 

Once you know these three things, you can determine whether a short-term loan is a suitable option. Usually, if you can repay a balance within a few months, need near-instant low financing, and don’t mind high interest rates, it’s a good option. 

However, alternative financing options, such as merchant cash advances, credit union loans, and bank overdrafts, offer more flexibility and often lower rates. Regardless of which way you’re leaning, have a look at your income stability, credit score, and any fees before you commit. This will help you further establish the best course of action. 

Key Takeaways

We hope the comparison we provided between short-term loans in Canada and the alternatives gives you a better indication of which option suits your needs. We also hope that examining the benefits and drawbacks helps you make an informed decision. 
If you’re interested in exploring a merchant cash advance as an alternative funding source, consider us. At Bizfund, we offer competitive MCAs for most businesses, and we aren’t too concerned with credit scores as long as you can prove financial stability. So, contact us here or check out our MCA page here.