How Smart Borrowing Can Help You Save

How Smart Borrowing Can Help You Save

If you can use a loan but unsure where to start or what you should know, this guide can provide some essential insight to make smart choices. Borrowing should be more than deciding what amount you want. Smart borrowing is about knowing what you can afford, and being familiar with what you should know before you sign a loan application.

Types of Online Loans

There are several loan options to consider when borrowing, and knowing what to look for when it comes to terms and rates will help ensure you’re making a suitable choice. 

Personal Loans – these are available with preferable rates and terms, but you need to qualify to be eligible. Whether banks or online lenders, they typically prefer lending to borrowers with a good credit score.

Installment Loans – this type of loan is fairly similar to a personal loan, where the monthly scheduled payments are over a term of many months or years, this option is for borrowers with a fair to good credit score.

Payday Loans – these are short term high-interest loans requiring repayment on your next payday with rates that make for an expensive way to borrow. This option appeals to those with poor credit history that might not be eligible for other types of loans.

Title Loans – these are where you use your vehicle as collateral. The only advantage is you do not need to be employed. When using this option, you risk losing your vehicle for a fraction of its value if you are unable to make payments and truly a last resort.

While every lender has their own criteria for who might qualify to borrow, most share similarities in what they are looking for in an applicant. While credit scores are more common as a method to review applicants of personal loans, many lenders of installment loans and payday loans use IBV (instant bank verification) to review a borrower’s banking history to make a decision.

RELATED: What Credit Score is Needed for an Online Loan 

There are lots of considerations when looking at Canadian loan options, and exploring the difference between banks vs online lenders is just the beginning. The difference with banks versus borrowing online often comes down to your credit score, where banks mainly approve borrowers with the least amount of risk and higher scores. In some cases banks do not provide unsecured loans and will only consider lending when collateral is involved. 

Saving with Smart Borrowing

In addition to knowing your credit score before looking at personal loans, you should also know your debt to income (DTI) ratio, as it’s something many lenders will also look at since it can tell them how likely you are to be able to repay a loan and make your payments.

Don’t just look at the interest rate, also look at the APR, because it’s a more accurate picture and includes any additional costs or fees. You could look at 2 lenders with comparable interest rates and monthly payments, but might discover the APR (annual percentage rate) is higher with one, which would suggest fees in the terms. Lenders are required to follow certain rules to ensure the accuracy of the APR. This means you should pay attention to the APR, as it represents the real cost of financing.

What to Look for with Online Loans

Clearly a place to start when considering online loans is to look at interest rates and APR, but you should also pay attention to a number of other things like terms and fees that might be involved. Being aware of all aspects of an online loan is important before signing an agreement so you don’t have unwanted surprises later. Looking for details about prepayment penalties or other fees would be the place to start. The last thing you want are personal loan mistakes that could have been entirely avoided if you only took the time to read the agreement first. 

RELATED: What to Know When Applying for Online Loans

Your agreement is made available to you before signing and includes details about the terms of the loan, which should include the amount, interest rate, amount of each payment, due dates, term, APR, and any other charges in addition to interest rates that may be applicable. 

Smart Borrowing with Online Loans

When borrowing, you want to evaluate whether you need to, since the cost of borrowing isn’t cheap, especially with high-interest loans. Everyone has their reasons, and there are a few things to keep in mind.

  1. Only borrow what you can afford, where the payments work with your budget
  2. Only borrow as much as needed, not as much as you can get
  3. Read the entire agreement and make sure to understand the terms before signing

Borrowing online is easier than ever, but it’s important that you choose the best option that works with your eligibility to make sure you don’t pay more than you have to.

Also see: How a Personal Loan Can Help Pay Off Your Debt Faster

While personal loans have many uses, paying off debt remains at the top for reasons in many cases. When someone owes on previous high interest loans and their credit score has improved and provides for better rates, this can allow them to borrow with lower rates and pay off those loans from the past. 

Known as debt consolidation, this is a smart play with personal finances that can help you save on what you might pay in interest. Even if there were prepayment penalties it can still be worth running the numbers. An alternative to personal loans is a line of credit, but the eligibility requirements might be comparable and not an option for everyone. 

Recommended: Smart Ways to Deal with Credit Card Debt

Eligibility for Online Loans

Lenders often have similar requirements for being eligible, with certain ones being more common than others. For the most part, the key requirements are usually having an active chequing account, being over the age of 18 (or  age of majority in your province), having a regular source of income, and being a Canadian citizen or permanent resident. 

Beyond the above, the other requirements with lenders will be similar but have small differences. For example, if trying to get a personal loan from a bank they might require a minimum credit score of 720, where an online lender might accept a minimum of 650 or 620. 

As mentioned, a number of lenders for installment loans might only look at the IBV results to evaluate an application, or a combination of IBV, credit score and alternative data. Most lenders have their own unique way of evaluating an application. 

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