Beg, Borrow or Steal: Preparing to Take out a Loan

07 Jun Beg, Borrow or Steal: Preparing to Take out a Loan

Last summer, Statistics Canada reported that the average Canadian owed $1.77 for every dollar they had to spend.[1] Obviously Canadians are living beyond their means – and so far beyond their means that it’s become normal to be in debt.

If your goal is to achieve financial security, it’s not a great idea to live beyond your means. On the other hand, the days of saving money in your mattress are long gone. There are times where it makes sense to purchase something significant and expensive, and a loan is the best way to make that possible.

Learn the Lingo

A loan is a sum of money that you borrow from a lending institution, such as a bank, to make a large purchase. When you are purchasing a house or a condo, you need a mortgage, a specific type of loan. Other common loans are auto loans, student loans and even business loans.

Not all loans are created equal, and it’s important to understand what you’re signing up for. Read the fine print before you sign any loan agreement, but you’ll need to first understand the vocabulary. Some of the most important terms to understand include:

• Interest: Interest is the charge for borrowing the money. This may be the most important thing to understand when it comes to taking out a loan.
• Term: This is the amount of time you have to pay back the entire loan and any interest that goes along with it.
• Simple vs. compound interest: Simple interest is a set rate on the amount of money you originally borrowed. Compound interest is interest on both that original amount of money and the compounding interest paid on that loan. Most loans are calculated with compounding interest.
• Secured vs. unsecured loans: A secured loan is backed by something you can offer as collateral, such as your house or your investments. An unsecured loan isn’t. In exchange, an unsecured loan often comes with a higher interest rate. It may require a stronger credit score too.
• Fixed vs. adjustable interest rates: A loan that comes with a fixed interest rate will maintain that same interest rate throughout the life of the loan. A loan with an adjustable (or variable) interest rate will change over time and is commonly based on the current prime interest rate.
• Open vs. closed mortgage: An open mortgage can be paid off in full, at any time, with no penalties. A closed mortgage allows only a limited amount of annual prepayment and includes a penalty if the mortgage is repaid in full before the end of the term. Although these terms are most common in a mortgage, open and closed non-mortgage loans do exist as well.
• Business loans: A business loan is a variation on the personal loans mentioned already – but for business purposes. These loans work similarly but you need a legitimate business reason (i.e., starting or expanding a business) to take out a business loan, and it will require collateral – either business collateral or personal collateral.

Prepare to Pay

When you’re considering your life goals, there are times you need to borrow money in order to achieve something. That doesn’t mean you have to be reckless or irresponsible. Taking the initiative to prepare yourself ahead of time can help you make the right choice for your specific situation.

Consider these 5 steps:

1. Find out your credit score. Your credit score is affected by your actions, such as whether you pay your bills on time, how much money you owe already and whether you have applied for new credit cards recently. Being aware of these factors can help you improve your credit score. For example, don’t apply for a series of new credit cards if you’re hoping to buy a house in the next year.
2. Create a budget. Look at the way you spend money and set up a budget. Think about how much more money you can afford to spend, both in the short term (i.e., in your monthly budget) and in the long term (i.e., paying for something over time may lead to a situation where you pay so much in interest that you can’t even sell the item in order to get rid of the loan). Also, consider whether you could pay off the loan faster and what would happen if you couldn’t pay it at all.
3. Do your research. Learn about all the organizations that offer loans and research every option thoroughly. Begin with your bank, but feel free to make an appointment at any other bank or financial institution. Consider online options. And look into any government programs to support you, especially if you’re a first-time borrower.
4. Read everything. Don’t sign anything until you have read the loan paperwork thoroughly and you understand it completely. Look for hidden fees and costs, such as a late payment fee or a prepayment fee.
5. Make a choice. Before you sign on the dotted line, select the loan that best fits you and your lifestyle. A loan isn’t always the perfect option, but if there isn’t another way to achieve your goals and you’re making a carefully considered decision, it may be the right choice to make in the long run for your financial security.

To learn more about achieving financial security, contact us.

[1] https://www.cbc.ca/news/business/statistics-canada-debt-1.5609510

Joel Rose

With over 35 years of experience, Joel Rose helps families – and their businesses – to prepare for the future. He offers guidance and support to help his clients create estate plans and succession plans that meet the needs of the whole family. Through his extensive professional and personal experience, Joel is known for his compassion and his ability to find a creative solution to meet each family’s needs.