How to Qualify for a Personal Loan

Applying for an unsecured personal loan can be a complicated process - especially if you have less than perfect credit. Our simple guide walks you through the process of qualifying for a personal loan step by step.

Canada is a nation built on debt. We borrow money to purchase our homes in the form of mortgages; to go to school through government student loans and lines of credit; and even to make day to day purchases via our credit cards. For all but the very wealthy, loans are a non-negotiable fact of life. 

Consider the following statistics from the Bank of Canada:

• At the end of 2017, Canadians owed over $2 trillion
• Roughly 75% of that debt was the result of mortgages
• Canada's debt-to-income ratio is 170% - meaning that Canadians owe an average of $1.70 for every dollar they earn per year after taxes (gross income)
• About 8% of Canadian households owe over 350% of their gross income - putting them at significant risk of defaulting on their obligations and facing bankruptcy, or worse.

At Magical Credit we specialize in helping out clients with troubled credit histories, offering them access to the cash loans they need to make ends meet, as well as a gateway to rebuilding their credit. 

Let's explore some of the steps you should take in order to qualify for a personal loan, and talk about a few of the potential pitfalls you may encounter along the way.

1. Before applying for a personal loan, you should check your credit score!

Virtually every adult Canadian has a credit file - as soon as you borrow money for the first time, your file opens. From then on every bill payment made or missed, every debt made good or defaulted, will be recorded. Your credit score or rating is hugely important when a lender is deciding whether or not you qualify for an unsecured personal loan. As a rule, the better your credit, the more generous the terms of your loan will be with regard to interest rates and payment terms.

But what credit score is eligible for a personal loan?

Credit scores in Canada are calculated on a 900-point range:

• 800 to 900: Excellent Credit
• 720 to 799: Very Good Credit
• 650 to 719: Good Credit
• 600 to 649: Fair Credit
• 300 to 599: Poor Credit

There a number of ways to check your credit score. In Canada, the two major companies that provide credit scores are TransUnion and Equifax. It's wise to try to get your score from both, as their calculations can differ. There are a number of free services online you can use to request your credit score from one of these companies - but make sure the service you use is on the up-and-up before giving them access to your personal information!

If your credit is poor, your report should be able to help you put the finger on why. Here are a few of the most common reasons for a poor credit rating:

• Missed bill payments: Not every bill paid or missed will be reported to a credit bureau, but many of them will. If you see a bill on your credit report, you'd better make doubly sure you're on top of your monthly commitments. The process of repairing your credit can be arduous, but it starts with proving you can be consistent about your everyday expenses.


• Having too many, or too few, open credit accounts: Having too many credit accounts indicates you're not responsible with your borrowing. Having too few means creditors don't yet have enough information about how you behave to draw conclusions. This is one example where successfully paying off a small cash loan like those provided by Magical Credit can be helpful.


• High credit card balances: If you're always walking around with a maxed out credit card, it doesn't exactly paint the picture you might like.


• Unpaid personal loans: It's okay, and expected, that you may have a number of loans being serviced at any given time. It's a problem if you're not making payments, or the combined total of those unsecured loans vastly exceeds your income.


• Too many credit applications: When a company or lender runs a credit check on you, it can have some effect on your score, though in most cases it is routine and minor. If, however, you are applying for credit all of the time, bureaus will raise a red flag.

If your credit score is atrocious, you'll face some hurdles in qualifying for personal loans, but it's not impossible. Here are some things you can do to improve your situation.

2. Fix any errors in your credit report.

If, while perusing your credit report, you notice an error, you can file a written dispute with the provider. If you're able to successfully have the error removed from your report, your score may improve!

3. Pay your debts, and pay your bills.

Seems obvious, right? Over time these good habits will bulk up your credit rating, and lenders will have more confidence in you. With that said, when you're already struggling staying on top of your bills can be easier said than done.

If this is the case for you, consider speaking with a financial adviser who can help you develop a budget. For those on lower incomes, community health centres will often provide free workshops or access to accountants working pro bono.

You should also set up preauthorized payments so that you never miss a payment. This means being very careful to ensure enough money remains in your account on the day your bills are debited so that they don't bounce - which will hurt your credit.

Finally, you might also consider consolidating or refinancing your loans to take advantage of a better interest rate and simplify your monthly payment commitments. By taking out a new loan to immediately pay off your previous loans in lump sums, you can get a fresh start. Just be careful not to dig yourself a deeper hole by failing to pay off the new loan!

4. Prove you have a stable income.

As a general rule, having a stable income is a huge factor in determining eligibility if you wish to obtain an unsecured personal loan. A lender is less likely to take a risk on you if they don't believe you'll have enough money on hand to make your payments on-time.

You'll need to provide most lenders with proof of income, as well as some indication that your employment status has been stable. Some lenders will make a deep dive to ensure that you have been honest about your employment status, including contacting the employer named on your application to prove that you actually work there.

There will also be some variation between lenders as to what types of income they will accept. For instance, Magical Credit accepts personal loan applications based on the applicant's regular government subsidies (such as disability benefits or child care subsidies), which other lenders might refuse.

Do some research into the expectations of lenders before applying - if your income status is currently in flux, and you are not in immediate need of financing, consider waiting until your situation is more stable before applying for a personal loan.

5. Find a cosigner for your personal loan application.

A cosigner is someone with a more established credit history who voluntarily agrees to guarantee that a debt will be made good. A common example is a parent cosigning on their child's first car.

By bringing in someone who the lender perceives as being more reliable, you may be approved for a personal loan you would otherwise be denied. Your cosigner is equally responsible for making sure that payments are made, and their agreeing to help you is a gesture of considerable trust, as any late payments will also affect their credit score.

If you do decide to go the cosigner route, we strongly advise you to take this trust you've been given seriously, and to commit yourself to making sure they have no cause to regret the favour.

6. Research lenders and find the right one for your situation.

There are literally hundreds of options out there for those in need of a loan, from big banks to credit unions, payday loan operations to informal arrangements between friends and family. If you're motivated to secure financing, it's important to make sure you compare lenders to find the one that best fits your situation.

Every loan provider will look at the basic factors we've mentioned already (income, credit score, how well you've done at repaying your previous debts), but they'll all take their own approach to evaluating your qualifications.

If you're fortunate enough to be in a position where you can get a loan anywhere, it's still wise to do your research to get the most favourable interest rate and payment terms available. If, on the other hand, like most of us your options are more limited, you may have to do a little more work before you apply.

7. Apply for a personal loan.

As with lending requirements and eligibility criteria, the way you apply for a personal loan varies from lender to lender. Let's take a look at how the application process works at Magical Credit.

We do our best to make applying as painless as possible. We offer unsecured personal loans in amounts ranging from $500 to $20,000, with repayment terms ranging from six to 60 months, depending on your needs and qualifications. Our online personal loan application is quick and easy, with an initial questionnaire which takes less than five minutes to complete, and a guaranteed response within 24 hours.

You can use our simple loan repayment calculator to figure out what you can expect to pay monthly, and all of the relevant information can be submitted virtually. We make no guarantee of approval; if we genuinely don't believe you will be able to promptly pay back your loan amount, it does neither our business nor your personal credit situation any favours to approve you.

With that said, we do specialize in offering assistance to those with bad credit - it's part of our philosophy that everyone deserves the opportunity to access personal loans if they show good faith and a commitment to repayment.

8. Repay your loan!

Technically, this step takes place after you've already qualified for a personal loan, but it's arguably the most important part, nonetheless. We want to help you rebuild your credit and live the life you deserve. That means sticking to your obligations!

We offer an easy-to-use online loan calculator to help you assess your ability to repay a loan and take control of your financial outlook.

We hope this article will help you get an idea on how to qualify for a personal loan.

If you're ready to get started with Magical Credit, visit our personal loan application page today!