Can you Afford to Borrow?

When you have unexpected expenses or a financial crisis and don’t have the money in an emergency fund or savings, many will turn to borrowing.

Before you ask yourself whether you can afford to borrow, you should be familiar with several things that will help determine if it’s an option, what your options are, how it can impact you, along with other things to know. 

What Can You Afford?

The question of whether you can afford to borrow starts with a few considerations. Look at your income, any debt you may have, and how much you have at the end of each month that is not spoken for due to other financial commitments like rent or mortgage, balances on credit cards, other loans or lines of credit. You should also consider other monthly expenses like groceries and transportation, and other payment commitments like insurance and anywhere else that your money goes each month. 

Where to Borrow 

If you have determined that borrowing is the right option for you then your next step would be to determine where you might apply. 

Bank Loans – if you have a good credit score and income, the bank can be an option when looking to borrow. It is worth mentioning that some have a minimum amount available to borrow and the process can take up to a week or sometimes several, depending on which bank. 

Online Loans – many online lenders are able to compete with the banks, and many are able to provide competitive rates. Applying online can be more convenient and also provide the funds much faster, with many lenders depositing in your account the next day if approved. 

For those that might have fair credit scores an online lender is often the better option. The average credit score in Canada is about 650 and can range from 300 to 900 overall. If your score is around the average or lower it is probably wise to include online loan options for borrowing when doing a comparison. 

When you have a bad credit score your options will be limited in terms of where you might qualify or be eligible to borrow. The challenges of a bad credit score when it comes to borrowing can also impact you in other unexpected ways as well. 

RELATED: Personal Loans – Banks vs Online Lenders 

How to Borrow 

Some basic criteria to be eligible includes being a citizen or resident with a Canadian bank account and address. You should also be employed or have a reliable income, which depends on the lender. Some do not require employment and will consider benefits for income as a reliable source. 

Knowing your credit score beforehand is advised so that you are applying for loan options where you might have a chance of approval. If you have bad credit, it doesn’t make sense to apply for personal loans since it is highly unlikely that you would be approved. 

• Good to Excellent – Personal Loans
• Fair to Good – Installment Loans
• Bad Credit – Payday Loans

A good credit score is mid 700, a fair credit score is about 600 to low 700, and a bad credit score is usually below 600. Every lender does things differently, but these estimates give you an idea of where your score should be and what to apply for.

Above provides an estimate for your credit score rating based on your score and info from Equifax, a Canadian credit bureau.

What if I Only Qualify for High Interest Loans?

Those that have bad credit may find the only options available where they might be approved can be high interest loans. Many unsecured loans are into double digits, and unless your score is excellent this is to be expected for Canadian loan interest rates . 

You can visit various lenders to apply, and this can take some time. Or you can make use of a website like GoodCheddar that is like a network or marketplace of lenders that can help you find your options while making it easier. 

Unless you have good to excellent credit there is a possibility that the borrowing options you find might be considered high interest loans. This type of loan has less difficult requirements for approval along with lower credit score expectations. Since the lender is taking more risk in this way they tend to have higher interest rates with their loans than compared to something like banking institutions which have higher requirements with better rates but more difficult to get approved for.

RELATED: How to Avoid High Interest Loans 

What About Borrowing For Non Emergencies?

Some will consider borrowing for things like a large purchase, travel and other reasons. If you are aware of your payments or costs and don’t mind what it might cost in interest, then a loan might be a good option for your needs. 

It’s important to see the big picture and not just the current need. Failing to do so can be cause for less than prudent decisions that can become issues later. Always use good judgment when it comes to borrowing, especially when not essential expenses. 

Borrowing a Cash Advance

Some that have a credit card will consider taking a cash advance from their credit card as it’s fairly easy and you can usually get up to about 25% of your credit limit. But there are few things to know if considering this that many don’t realize until later.

First, you should know what you can afford. Just because you can easily get a large sum from a credit card cash advance doesn’t mean you should. Most personal or installment loans use simple interest. This is a set rate on the principal (amount borrowed) that would have the same amount due each month. While some loans can have a variable rate, most are fixed and it’s recommended to select this type. A credit card uses compound interest which not only has interest on the principal, but there can be interest on the interest accrued. 

Second thing to know would be that making minimum payments on a credit card cash advance is much more expensive than many assume. On a $1,000 advance it could take over 10 years if using the  minimum payments option, and the interest would be close to the principal borrowed.

RELATED: Personal Loans vs Credit Cards – Which is Better?

Better Borrowing 

The cost of borrowing can be more than the interest you’ll have to pay. If you are late on payments it can damage your credit score. If you owe for a number of things and take a loan it can increase your debt to income ratio too much which can also impact your score. Managing your credit score and debt is important so that you have good options when it comes to the next time you might need to borrow. This is known as credit utilization and should also be managed for that next time that you might need to borrow. 

Knowing money management and basics like budgeting are all in your favour to help keep your finances in order. When they are not monitored and things get off track, it is often once things are out of control that it is realized. Staying on top of your finances starts with developing good habits, such as making time each week to go over things. 

In the end, the answer might not be can you afford to borrow, but how much without going too far into debt or having an overly tight budget for other financial commitments. 

Recommended Reading:

• Benefits Of Good Credit and Why it Matters 
• How to Borrow – Avoid These Loan Mistakes 
• What Lenders Look for When You Want to Borrow 
• Dealing with Debt Struggles Before They Get Worse