Lending and borrowing seems pretty simple, right? One party needs money to borrow and the other party has extra money and can lend it to earn some interest. Match them up and everything is good, right? Well, not exactly. There are a lot of subtle dynamics at play and when it comes to borrowing, having all the details you can get before you sign is wise.
Here is a quick of things that it will really help you to know before deciding on a loan option:
Loan Insurance – while some might say it’s required, it really isn’t. This is completely optional and you do not have to take it. Learn more about your options here.
Loan Term – when you take a longer term to repay the loan, your payments will be lower. If you’re on a tight budget it’s sometimes necessary to choose a longer term. But if you can go with a shorter term, the cost of borrowing is less because you pay less interest.
Early Payoff – paying your loan off early might sound great, but with some lenders this can cause a prepayment penalty at times. Read your agreement before signing to be sure.
Credit Score – a 3 digit number, it’s not the only thing lenders look at. They will also consider your credit history, debt to income ratio, income, credit utilization, number of current loans, derogatory items from your credit report and more. Your credit history is as much (or more) important to lenders as your credit score.
Auto Deny – some lenders use algorithms for checking loan applications. Using a set of ‘rules’ and third party data and/or instant bank verification (IBV) to review your bank account history are just some of the ways that your loan request might be reviewed. If you don’t meet the eligibility criteria, your application might be denied.
Extra Fees – while looking at the interest rate is often what people do first if comparing loans, what you really should be looking at is the annualized percentage rate, or APR. If this number is much higher than the interest rate, it’s likely there could be some extra fees you should know about, which you would find when you read the terms of the loan agreement. In accordance with the Trust and Loan Companies Act [S.C. 1991, c. 45] from Canada’s Office of the Superintendent of Financial Institutions (OSFI) and the info must be in a loan agreement.
|What They Say||What to Consider|
|Get money today||It could be a high interest loan that may take a long time to pay off. It might also carry prepayment penalties if you try to pay sooner than the term stipulates too.|
|Get a loan without impacting credit score||This is often untrue, especially if it’s a debt consolidation loan and you miss a payment. It would be reported to the credit bureaus and your score would suffer as a result.|
What you need and what you can afford can be the beginning of a debt spiral. For those that do not qualify for options like personal loans or installment loans and need money quickly, often they will resort to a payday loan, an expensive way to borrow.
This type of loan requires repayment when you receive your next pay cheque, or on your next payday. Often a borrower will use much of that to repay the loan, leaving them with not enough funds for other matters and find themselves taking another loan to make ends meet. It’s a difficult situation, and while emergencies or unexpected expenses happen, borrowing more than you can afford to pay when due often leads to new problems.
One way to potentially avoid this is by creating an emergency fund. Even if you don’t have much leftover each month, it’s in your best interest. Even if you have to give something up temporarily to build up an emergency fund, it’s usually worthwhile. Since the average payday loan is around $400 in Canada, putting aside $40 per month (or $20 bi-weekly) can help avoid the need for taking a payday loan in future. Putting this amount away for the future over 10 months would provide you an emergency fund of $400 to have on hand for when you need it.
When comparing your options among lenders, it’s often wise to partner with a licensed lender, or ones that are part of an association such as the Canadian Lenders Association (CLA) or the Canadian Consumer Finance Association (CCFA) for example.
Some other things that banks (or lenders) might not want you to know include they sell your info, overdraft fees are a notable part of a bank’s income, and the minimum credit card payment is like a trap that gets you to pay more in interest before your card is ever paid off.
Sometimes you will hear that a debt consolidation loan is cheaper than if you went about filing a consumer proposal but this also tends to be misleading. If you’re in a situation where a proposal is one option, consider that any costs from a licensed insolvency trustee goes towards administration work and helping you reduce your debts significantly, where some debt settlement services are in business to make money and that can include high interest loans.
With any loan agreement, you should always read the terms before signing. This way you know what you are not only agreeing to, but help to avoid unpleasant surprises in future. If you take short term loans on a regular basis it can be signs of a deeper financial issue and you may need to consult with a financial advisor.
GoodCheddar provides articles and advice but if you are in need of real help it is advised that you speak to a professional financial advisor.
- How to Find Legitimate Lenders Online
- Personal Loans Myths to Know (and Ignore)
- What to Know When Applying for Online Loans
- What Lenders Look for When You Want to Borrow
- What to Know About Canadian Personal Loan Rates