Canada
How loans work: a plain-English guide
A loan is simple in principle: someone lends you money now, and you pay it back over time with interest. The details — rates, terms and the total cost of borrowing — are what actually matter. Here's how it works in Canada.
What a loan actually is
A loan is money you borrow and agree to repay, usually in fixed payments over a set term. The lender charges interest for the privilege, expressed as an annual percentage rate (APR). Some loans are secured against an asset like a car or a home; others are unsecured and rely on your income and credit instead.
Different needs call for different products. Compare the main options in loan types compared before you decide.
What lenders check
When you apply, most lenders look at some mix of:
- Your income and how stable it is
- Your credit history and score
- Your existing debts and monthly obligations
- For secured loans, the value of the asset you're borrowing against
If your credit is thin or damaged, you still have options — see bad credit loans and no credit check loans.
The cost of borrowing
The headline interest rate is only part of the picture. The total cost of borrowing includes interest plus any fees, over the whole term. A lower monthly payment stretched over more years can cost far more overall. Always ask for the APR and the total you'll repay, not just the monthly figure.
How repayment works
Most loans are repaid in regular installments that cover both interest and principal. Missing payments can add fees and hurt your credit, while paying ahead can save interest — though some loans charge a prepayment penalty. Know the rules before you sign, and only borrow what you can comfortably repay. If debt becomes hard to manage, see borrow responsibly.