Worked Examples and Checklists
How to compare two personal loan offers in Canada: a worked example
Compare Canadian personal loan offers by APR, total cost and conditions, with an illustrative $12,000 example covering fees, optional insurance, longer terms and variable rates.
To compare two personal loan offers fairly, line them up for the same amount and the same term, then compare the APR and the total cost of borrowing in dollars, and only then the conditions: prepayment, insurance, fees on default and the lender's complaint process. In the illustrative example below, an offer with a rate 1.5 points lower turns out to cost about the same once its fee is counted, and more than $1,300 extra once its optional insurance is accepted. The monthly payment is the least reliable guide of all.
Part of the personal loan cost worked examples. All figures are illustrative and do not describe any real lender.
The two offers
You need $12,000 to replace a furnace and want to repay over 5 years.
| Offer A (your credit union) | Offer B (online lender) | |
|---|---|---|
| Amount | $12,000 | $12,000 |
| Rate | 9.99% fixed | 8.49% fixed |
| Term | 5 years | 5 years |
| Fee | None | $400 deducted from the advance |
| Optional insurance | Offered, not included | Pre-selected at $25 a month |
Step 1: payments and interest
Using the personal loan calculator:
| Offer A | Offer B | |
|---|---|---|
| Monthly payment | about $254.91 | about $246.14 |
| Total interest | about $3,294 | about $2,768 |
At this point B looks cheaper by about $526.
Step 2: add the fee and find the APR
B deducts $400, so you receive $11,600 but repay as if you received $12,000.
- B's APR on $11,600:
=RATE(60, -246.14, 11600)*12≈ 9.94% (method in calculating APR when fees are deducted). - A's APR: 9.99% (no fees).
Total cost of borrowing: A about $3,294; B about $2,768 + $400 = about $3,168. B is still marginally cheaper, by about $126, but you received $400 less. If you need the full $12,000 in hand, you would have to borrow more from B.
Step 3: deal with the insurance
B pre-selected creditor insurance at $25 a month. Optional insurance is excluded from the APR because you can refuse it, but if you accept it:
- $25 × 60 = $1,500 extra.
- B's total outlay becomes about $14,768 + $400 + $1,500, and its effective yearly cost, if you count the insurance, rises to about 14.2%.
Insurance can be worth having, but it should be a separate decision: compare it with your existing life and disability coverage and read the exclusions. See loan insurance add-ons. Under the Bank Act, banks may not pressure you into buying another product as a condition of a loan (coercive tied selling); provincial rules address similar conduct by other lenders.
Step 4: watch for a different term
Suppose B instead offers 9.49% over 7 years: the payment drops to about $196.07, which is tempting, but total interest rises to about $4,470, roughly $1,175 more than A. A lower payment from a longer term is not a cheaper loan. Always compare at the same term first; then decide whether a longer term is worth its extra cost.
Step 5: variable-rate offers
If an offer is variable, say prime plus a margin that equals 8.99% today, model a rate rise. Illustrative, over 5 years:
| Scenario | Payment | Total interest |
|---|---|---|
| Rate stays at 8.99% | about $249.04 | about $2,943 |
| Rate 2 points higher for the whole term | about $260.85 | about $3,651 |
The second line is a stress test, not a forecast. If the higher case would strain your budget, the fixed offer is the safer choice.
Step 6: compare the conditions
| Condition | What to check | Why it matters |
|---|---|---|
| Prepayment | Can you repay in full or in part without a charge? | Lets you save interest later; see prepaying early |
| Default charges | NSF fee, default interest, collection costs | These can add up quickly if a payment bounces |
| Payment dates and method | Pre-authorized debit, flexible dates | A date just after payday reduces missed payments |
| Fee refunds | Is part of the fee refunded if you repay early? | Affects the cost of an early payoff |
| Complaints | The lender's process and external body | OBSI for banks; provincial office for many others |
| Licensing | Provincial licence for non-bank lenders where required | A missing licence is a red flag |
Decision summary for this example
- If you need exactly $12,000 in hand and do not want insurance: the two offers are nearly equal; A is simpler.
- If B waives the fee: B is cheaper by about $526.
- If you would accept B's insurance without comparing it: A is far cheaper.
Use the offer checklist to record each answer before you sign.
Frequently asked questions
Should I always take the lowest APR?
Usually, if the term and amount are the same. A slightly higher APR can be worth it for better conditions, such as free partial prepayments or a lender with a clear complaint process.
Will comparing offers hurt my credit?
Each full application usually adds a hard inquiry. Ask about pre-qualification with a soft check, and keep formal applications within a short period.
Can I ask a lender to match another offer?
You can ask. Some lenders, especially your own bank or credit union, may improve an offer to keep your business. Bring the competing disclosure statement.
How long is an offer valid?
It varies. Ask how long the rate is held and whether it can change before funding.
Sources
- Financial Consumer Agency of Canada — comparing loans; your rights against tied selling
- Justice Laws Website — Bank Act consumer provisions and disclosure regulations
- Consumer Protection Ontario — credit agreements with non-bank lenders in Ontario
