Your first loan

This is the first time in your life that you are borrowing money! You are probably wondering on what lending institutions base their decision to loan. Primarily on three things: Your reason for borrowing, your financial situation and your ability to repay the loan.

Your reason for borrowing

If you are taking out a loan to buy a house, it is understood that the property itself secures a large part of the loan. This makes the decision much easier. However, just because the loan is secured does not mean that your application will be automatically accepted. You also have to be able to make payments. However, if you are applying for a loan to consolidate debts, which involves no security, your file will be exhaustively reviewed in order to evaluate all the risks.

Other applications considered high-risk would be, for example, a loan to start up a business, a personal loan "just to tide you over" while you wait for your tax refund, or a loan to pay for a vacation.

Financial institutions consider car loans (if the vehicle is new and under warranty), loans to contribute to RRSPs and home renovation loans to be low-risk.

Your financial situation

You must provide your advisor with all the relevant information (your employment status, salary and debts). This information must, of course, be complete and true. We recommend bringing a copy of your bank statements from other financial institutions, a copy of your pay stub and, if possible, a balance sheet listing your assets and debts. Once all this information has been gathered, the institution will confirm certain information such as your salary and employment status (permanent or temporary, seasonal, freelance, on-call, etc.).

Your ability to repay the loan

Your ability to repay the loan is the most important factor. In the financial world, this is known as your debt ratio. It is calculated by dividing the total amount of money used for debt repayment, including the payment on the loan in question, by your gross income. The result should not exceed 35% (or 0.35). A value over this number will make it difficult for you to get a loan from a financial institution. Rarely, an exception is made, but you would have trouble making ends meet anyway.

At this stage of your application, what is called your credit profile will also be evaluated by a credit bureau. The latter will make a report of all your loans including your credit cards, and your payment history. For example, if your debt ratio is less than 35% but you are constantly late with your credit card payments, you may not qualify, while the opposite scenario will be to your advantage.