What to consider before borrowing money

Whether it’s paying for surprise expenses like car repairs or better managing your debt, borrowing money can help you reach your goals. But which borrowing solution is right for you? And what are some things to consider before you borrow?

Here’s some information to help you take charge of your finances.

Borrowing solutions overview

There are lots of different borrowing options on the market. Choose one that helps you achieve your goals and manage your finances. Ask yourself what loan payment you can afford. And always do your research. Being prepared could save you on interest and fees in the long run – and may reduce your stress levels along the way.

Personal loan

Money borrowed from a lender that you repay in full by making regular payments over a period of time.

Line of credit

Open credit that allows you to borrow up to a pre-determined limit.

Credit card

A payment card that lets you make purchases up to a pre-determined credit limit with borrowed money.

Payday loan

A short-term, typically higher-interest loan where the borrower agrees to pay it back when they receive their next paycheque.

Buy now, pay later

A payment method used by retailers where you buy now and pay over time – either in smaller installments or by a set date.

Let’s take a closer look at each option and some tips for managing debt.

Personal loans

With personal loans, you borrow a fixed amount of money and agree to make regular payments over a period of time. Personal loans are ideal if you want predictable payments and if you want to be able to estimate when you could be out of debt. It’s important to understand the loan’s total cost of borrowing before you sign. The total cost of borrowing takes into account the amount you wish to borrow and the interest charges over the length of the payback period (or term).

Debt consolidation loans are a type of personal loan. If you have balances on multiple credit cards or higher-interest loans, merging them into a single debt could help you save on interest costs. Consolidating debts into one loan can leave you with one regular loan payment with a set interest rate. This can make it easier to manage your money and could help you reduce your debt sooner.

Things to consider

  • Personal loans are available with fixed or variable interest rates. A fixed-rate loan has the same interest rate for the entirety of the borrowing period, while variable rate loans have an interest rate that can change over time. Find out how to protect yourself when rates rise.
  • Terms can range between 1 and 7 years
  • You may be allowed to make extra payments without penalty to save on interest fees.
  • The longer you take to pay off your loan, the more interest you’ll end up paying.
  • Some lenders let you pay off your loan before the end of your term without a penalty. Before you sign a loan agreement, check the terms and conditions to understand if there are prepayment fees.

Source: Personal loans, Financial Consumer Agency of CanadaOpens in new window.

Line of credit

A line of credit is open credit that lets you borrow money up to an agreed credit limit when you need it. You only need to repay the interest charged on the amount borrowed each month. However, repaying more than the interest charged each month will enable you to reduce your outstanding balance sooner. Once you’ve paid back any of the credit you’ve used, it’s available to you again without the need to reapply.

Things to consider

  • Interest rates can be lower than those offered by most credit cards.
  • The interest rates are typically variable, meaning they’ll rise and fall with changes to the prime rate.
  • Your credit score, which is based on your financial history, may affect the interest you’ll pay. Understand your credit score today.
  • You can repay the interest charged on the amount borrowed each month (the minimum payment) or pay more to reduce the outstanding balance sooner.

Source: Lines of credit, Financial Consumer Agency of CanadaOpens in new window.

Credit cards

Credit cards allow consumers the ability to borrow funds to pay for goods and services with merchants that accept them as a form of payment. You’re required to pay the lender back at the end of your billing cycle (typically monthly). Only the minimum amount is due, but you have the option to pay the balance in full. If you pay your statement balance in full by the due date indicated in the statement, you will not pay any interest. As you reduce your balance, you can reuse your available credit as it becomes available.

Keep in mind that paying only the minimum is expensive. The interest on the remaining balance will continue to grow. Many credit cards have an interest rate of 20%, with higher rates for cash advances and balance transfers.

Things to consider

  • Different cards offer different rewards and benefits, interest rates and fees. Take the time to compare your options. Choosing a card with a lower interest rate can save you money if you routinely carry a balance on your card.
  • Making all your payments on time could help improve your credit score.
  • You can pay as little as the minimum payment at the end of your billing cycle, or more (up to the entire balance). Credit cards typically don’t have prepayment penalties, giving you the flexibility to repay the lender back in full without additional fees.
  • Be mindful of using your credit card for a cash advance. The interest rate is typically higher than for purchases, and some companies may also charge a fee.
  • Know when your credit card payment is due each month to avoid interest and other potential charges. This information is typically found on your statement or mobile app.

Interest rates can differ between products. It's generally best practice to pay down higher interest rate debt first so you can lower your total amount in interest paid.

Source: Choosing a credit card, Financial Consumer Agency of CanadaOpens in new window.

Payday loans

Payday loans offer you quick access to money when you need it. They’re short-term loans of up to $1,500 that are usually easy to get but can be very expensive in terms of fees and interest. The cost to borrow can be equal to an interest rate of 500-600%.

Things to consider

  • Before taking out a payday loan, be sure you can pay it back on time. If you can’t pay it back, you’ll face even more fees and interest charges.
  • The loan will typically need to be repaid with your next paycheque.
  • If you live in Alberta, British Columbia, Manitoba, New Brunswick or Ontario, you have up to 62 days to pay the loan back. Be sure to read the fine print so you understand all the terms and conditions.
  • Consider other borrowing options when possible. Payday loans are an expensive way to borrow money.

If you’re stuck in a debt cycle, think carefully about the long-term consequences of taking out a payday loan. Seek advice from reputable sources to explore the different financial options that are available to you if you’re having trouble making ends meet because you can’t make the payments on your debts. There are qualified professionals who can help you find the best solution for your financial needs. This advice is confidential, non-judgmental and often free. Some options include:

  • A financial advisor
  • An accredited credit counsellor
  • A licensed insolvency trustee or an insolvency lawyer

Learn how to get help with debtOpens in new window.

Source: Payday loans, Financial Consumer Agency of CanadaOpens in new window.

Buy now, pay later

“Buy now, pay later” (BNPL) is a short-term financing option used by retailers, including online stores. It allows you to either break up the cost of a purchase into several smaller payments, or pay for the item in full later (by the due date).

Things to consider

  • If you don’t pay on time, you may have to pay a lot of interest and fees. The interest usually starts from the date you made the purchase.
  • Some companies may also charge an administration fee. This would add to the total cost of your purchase.
  • If you’re having trouble paying for the things you need, avoid BNPL. Missed payments will likely make your debt even bigger and will negatively affect your credit score. Learn more about your credit score.

Source: Buy now, pay later plans, Financial Consumer Agency of CanadaOpens in new window.

Is borrowing money right for you?

There are situations when borrowing money isn’t a good idea. Take the time to consider whether you need to make a purchase. You may want a new car, but do you need it now? Delaying a major purchase until you’re in a better financial position can help you in the long run.

Here are some other reasons to hold off on borrowing money:

  • If you have a low credit score, work to improve it so you can increase the likelihood of qualifying for better borrowing opportunities. This may include a lower total cost of borrowing. Learn how you can improve your credit score.
  • Major expenses coming up? If your car insurance or other annual payments are due soon, consider waiting. A budget can help you plan for these expenses and take control of your money.

The bottom line

Borrowing money can be a great way to help you achieve your goals, but it’s important to do your homework. By learning more about finances, researching the different borrowing options and discussing your finances with a professional, you could save hundreds or even thousands of dollars in interest and fees. This might even reduce your stress levels as you take steps to improve your financial health.

This material has been prepared for informational purposes only and is not intended to be a substitute for obtaining advice from a financial professional.

Adapted with permission from the Financial Consumer Agency of Canada, 2022.

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