When it comes to borrowing money, it’s usually a commitment that isn’t cheap and you should know what you might be getting yourself into. You should also know whether the timing is right and other pitfalls to avoid at the same time.
While you can use a personal loan in Canada for just about anything from car repairs and home renovations to taking care of credit card debt and more, there are a few things to know about avoiding potential pitfalls when considering personal loans.
Know the Terms
Borrowing money usually means there is a cost to it, and being aware of any such fees or hidden costs is important, before you sign. While you can ask, you owe it to yourself to carefully review the terms and conditions of the agreement.
You should carefully review the terms of any loan that you might consider, looking at the fees and APR so that you truly understand the cost to you.
Know the Costs
To protect yourself from unwanted surprises later doesn’t end with knowing the costs of the loan, you also need a plan when it comes to repaying what you owe. Determine what you can afford in terms of monthly payments, because this is what may impact your budget the most.
Being able to comfortably take care of your debt can make all the difference with how you live with debt and even your ability to pay it off. This would include any fees or penalties in the terms too.
Know the Score
Your credit score has a lot to do with what interest rate you might be offered when looking at personal loans. Sometimes it can pay to wait, like when you have a credit score of 690 and most lenders would offer a much better interest rate at 700+. While the cutoff point varies by lender, some of the credit scores that you could provide better terms might include; 650, 670, 700, 720, 750 and of course 800 or more. Many Canadian lenders are different, so where a credit score might offer better rates varies.
Sometimes it is worth improving your score and waiting a little longer before you apply for a personal loan as you might qualify for better interest rates.
If you are shopping around for a personal loan, it is not in your best interest to also be comparing other loans or even credit cards. This will create excessive hard inquiries on your credit report and it would probably impact your credit score.
When shopping for a loan, the credit bureaus know you might be comparing and so long as the queries are minimal and around the same time it’s usually fine.
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Unless it’s for some type of emergency, it’s best not to over borrow. Even when you can find a lender that will accommodate you while others think your debt to income ratio might be too high.
Not only can a high debt to income ratio impact your ability to borrow, it can also affect your credit score as well. You also should consider that over borrowing tends to mean you carry too much debt, and that it can make things difficult when it comes to your financial obligations like bills, loan payments and similar.
Applying for too much credit can also be an issue. Not only over borrowing, but applying for credit cards and personal loans at the same time means more hard inquiries that can affect your credit score further, or applying for more than one loan at the same time.
Borrowing Too Early
If you’re still paying off a loan such as one for a house or car, it might be too early to apply for a personal loan, or at least until most of the current debt is paid off and depending on the personal loan amount you were considering.
When your Total Debt Servicing Ratio (TDSR) is more than 60% of your income, many lenders might look at your application as too much of a credit risk. The more debt you carry, the higher you are considered a borrowing risk.
This should come as no surprise, but missing payments on a personal loan can have a negative affect on your credit score, as well as your ability to qualify in future should you need some other type of credit product like loans or credit cards.
Your payment history is one of the most important factors of your credit score, so missing payments on personal loans is best to avoid.
A late fee for personal loans can be charged as a dollar amount, or it can be a percentage of your unpaid monthly payment. To avoid late payments, setup an alert to remind you a few days before the due date, or use automatic payments.
While hindsight is 20/20 it can help to know potential issues to avoid in advance. Since a personal loan is kind of a lengthy commitment which can affect you even after you’ve paid it off, knowing some of the common mistakes to avoid can help in a big way.