BORROWING IN CANADA
Are you looking to borrow money in Canada? You are in luck. There are plenty of financing options for Canadians.
In this article, we are going to look at different types of borrowing options for Canadians. We will look at personal loans, debt consolidation, car loans and mortgages.
For each loan type, we will examine who may need it and when. You will discover what to look for and protect yourself from credit traps.
Lenders use different factors to assess your creditworthiness. The factors considered are dependent on the type of loan. The factors most lenders consider are your income, debt, assets and credit history.
There are benefits to being responsible with your credit. You can choose from a wider variety of financing options.
A personal loan is when you are borrowing a fixed amount and agree to pay it back over a set time. As the borrower, you must pay back the loan in full, along with any interest and applicable fees. You do this by making regular payments, referred to as instalments.
Most financial institutions offer personal loans. Personal loans range in length from six to sixty months and are usually between $100 and $50,000.
You can use a personal loan for a wide variety of purposes. You can pay for home renovations, new furniture, or to consolidate high-interest debt. Unsecured personal loans are loans that do not have an asset backing them. These loans tend to have higher interest rates than secured loans.
Before signing up for a personal loan, make sure you understand the loan agreement. Review the loan amount, interest rate, term, payment amount and any fees you are required to pay.
Find out if it has a fixed or variable interest rate. With a fixed interest rate, the interest rate on your loan will stay the same during the entire term. Meanwhile, with a variable interest rate, the rate can change.
Beware of short term personal loans with high fees, known as payday loans. Payday loans can be convenient. They also prove costly due to their high-interest rates and fees.
Try not to borrow more than you need or more than you can afford to pay back. Otherwise, you could find yourself in financial trouble.
Debt consolidation is when you take out a line of credit or loan to pay off high-interest debt. When you consolidate your debts, you will only need to make a single monthly debt payment. This is instead of paying each of your debts separately.
Debt consolidation is worth considering when you are looking to pay off your debts. Also, when you struggle to pay more than your minimum payments. It makes sense when the interest rate on the debt consolidation loan is lower than the interest rates on the debt you are consolidating. By lowering your cost of borrowing, you can reach debt freedom sooner.
You can take out a consolidation loan from your financial institution. But, your financial institution does not have to offer you one. Your financial institution could deny you a debt consolidation loan because your credit score is too low.
As with any other type of financing, you will want to shop around when looking for a debt consolidating loan. When applying for two or more loans, try to do so within two weeks. Keep your credit applications in this time window. It is less likely to have a considerable impact on your credit score.
Most debt consolidation loans come with an affordable minimum payment. This is often an interest-only payment. Yet, you won’t find yourself any further ahead by making it. Aim to make more than the minimum amount to pay off your debts sooner.
A car loan is usually provided by financial institutions or car dealerships. The collateral or security is the vehicle itself. If you do not make your car payments, your lender could repossess your vehicle. They could then sell your vehicle to try to recover the money you owe them.
If you are planning to buy a car, unless you can pay for it entirely in cash, you may need to take out a car loan. A good rule of thumb is to aim to save a 20 percent down payment towards your new vehicle. You can then use the car loan to pay for the rest of the car’s price.
When looking for a car loan, there are several things to consider. Look at the interest rate, payment schedule, any financing fees, loan amount and the length of the loan. Be sure to review all these details ahead of time before agreeing to car financing. It also helps to shop around to see if there are better deals out there.
In recent years, the trend has been towards longer-term car loans. A car loan term of seven or eight years makes your monthly payments more affordable. But, you can end up in a situation of negative equity. You may still owe money on a car that no longer works. That is why it is a good idea to limit your car loan to a maximum of five years.
A mortgage is a loan to buy real estate. A financial institution most often provides it. The collateral or security is the property itself. If you do not make your mortgage payments, your financial institution may take possession of your home. They will sell it to recover the money owing. Unless you can afford to pay for a home in cash, you will likely need a mortgage when buying a home in Canada.
Although your financial institution puts up most of the money for the home, you will still need to put some money down. You will need to put down at least five percent, depending on the price.
When you are looking for a mortgage, it is easy to focus solely on the mortgage rate. While the mortgage rate certainly matters, there are other important factors to consider.
Do you want a fixed or variable rate mortgage? Like a personal loan, with a fixed-rate mortgage, your mortgage rate stays the same during your mortgage term. This is different from a variable rate, where your mortgage rate can change.
If your goal is to be mortgage-free sooner rather than later, you will want a mortgage with generous prepayment privileges. Most lenders let you increase your mortgage payment and make lump-sum payments on your mortgage without penalty.
If there is a good chance you could move during your mortgage term, you will want a portable mortgage. Portable means you can take the mortgage with you without paying a costly mortgage penalty.
Speaking of costly mortgage penalties, this is something to beware of when signing up for a mortgage. Not all mortgage lenders calculate their mortgage penalties the same way. Be sure to ask about mortgage penalties before signing up, so you are not blindsided.
BORROWING OPTIONS SUMMARY
The borrowing options we looked at were personal loans, debt consolidation, car loans and mortgages.
You can use a personal loan for a wide variety of purposes, for everything from home renovations to new furniture.
Debt consolidation is when you use a loan to pay off high-interest debt. By doing this, not only do you save on interest, you will only have one monthly payment to make.
A car loan is a loan specifically for buying a vehicle. You can get a car loan from a financial institution or car dealership.
A mortgage is a loan for buying real estate. Although the lender usually puts up most of the money, you are required to put some money down, at least five percent of the sale price in Canada.