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.
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.
Money borrowed from a lender that you repay in full by making regular payments over a period of time.
Open credit that allows you to borrow up to a pre-determined limit.
A payment card that lets you make purchases up to a pre-determined credit limit with borrowed money.
A short-term, typically higher-interest loan where the borrower agrees to pay it back when they receive their next paycheque.
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.
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.
Source: Personal loans, Financial Consumer Agency of Canada
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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.
Source: Lines of credit, Financial Consumer Agency of Canada.
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.
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 Canada.
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%.
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:
Learn how to get help with debt.
Source: Payday loans, Financial Consumer Agency of Canada.
“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).
Source: Buy now, pay later plans, Financial Consumer Agency of Canada.
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:
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.
