Credit and Debt
Secured and unsecured loans, lines of credit, interest, payment schedules—taking out a loan can feel complicated, but it doesn’t need to be. While being in debt doesn’t always sound like a good thing, sometimes it’s necessary to help achieve our dreams or navigate life’s big hurdles. Let’s break down the world of personal lending so that you can live out your dreams without staying in debt.
Isn’t a loan just a loan?
You borrow money, you pay interest on the amount you take, and you pay it all back. While it may sound simple, there are different types of loans to explore, depending on your assets, income, credit score and comfort level. Working with an Everyday Banking Advisor will allow you to navigate your options and choose the best loan for you.
Secured versus unsecured loans
To discover which loan is right for you, first determine whether you’re looking for a secured or unsecured personal loan. While both secured and unsecured loans can be used for similar purposes, there are some differences in how they function.
Secured loans
A secured loan can help you qualify for a larger amount or a lower interest rate by using a tangible asset, or collateral, to secure the loan. Collateral you can put against the loan include personal property, investments or other eligible securities.
Securing your loan to a tangible asset will sometimes let you borrow more money than an unsecured loan. If you were to default on a payment, the bank can take possession of the asset to recover some of their costs.
For example, a home equity line of credit (HELOC) would be considered a secured loan, because it’s tied to the market value of your home.
Unsecured loans
For an unsecured loan you don’t need to have a tangible asset, but your credit score will come into play in terms of how big of a loan you qualify for, the interest rate you’ll pay and the length of repayment terms. Often unsecured loans allow you to access smaller amounts, have a higher interest rate and shorter repayment terms than a secured loan would.
Debt consolidation
Debt consolidation
If you have a number of small loans, or unpaid balances on a number of credit cards, a consolidation loan might work for you. It will help you pay off your higher interest debts, and then you can pay down the loan on a payment schedule at a lower interest rate. Then you re-pay all that you owe with just one payment, whether that’s a weekly, bi-weekly, semi-monthly or monthly basis.
What about payday loans?
Payday loans are a type of unsecured loan that works like a cash advance and is tied to the borrower’s paycheque. They’re often for small amounts that don’t require an application and are received quickly. While the convenience of “fast money” may feel tempting, this form of borrowing money is very expensive compared to other personal loans—with fees upwards of $20 per $100 borrowed.
While a personal loan may require an application and approval process, you‘ll save a lot more money in the long run thanks to lower lending rates.
Common uses for personal loans
Personal loans can be a versatile financial tool when used wisely, giving you access to funds for:
- Paying off high-interest debt: consolidating credit card balances or other high-interest loans into a single personal loan with a lower interest rate can save you money and simplify your payments.
- Home repairs, renovations, upgrades and landscaping: funding home improvements, repairs or renovations, upgrading appliances or landscaping projects.
- Vehicle purchase or repairs: purchasing a new or used vehicle, and financing unexpected vehicle repairs or maintenance.
- Investing in yourself: providing capital to start a small business or pursue further education.
How does my credit score affect my ability to get a loan?
Maintaining a good credit score is very important when you want to borrow money. Having good habits like paying off your credit card balances or trying not to always borrow to your maximum limit are just a couple of ways to enhance your credit score. Your credit score will affect whether or not you qualify for a personal loan, your interest rate and how much you can borrow.
Ways to pay off your personal loan
You don’t have to navigate this decision alone. An advisor can empower you to choose a loan and create a repayment schedule that fits your budget. Here are some tips for paying off your personal loan:
- Make extra payments whenever possible. Even small additional payments can help you pay off your loan faster and save on interest.
- Consider bi-weekly or accelerated bi-weekly payments. This can help you reduce the total interest you pay over the life of your loan.
- Consolidate your debt. If you have multiple high-interest debts, consolidating them into a single personal loan with a lower interest rate can help you save money and simplify your payments.
- Avoid taking on new debt. While you're paying off your personal loan, try to avoid taking on new debt that could strain your finances.
Make the most of your personal loan
Whether you need to borrow a lot or a little, keep the following in mind when you’re contemplating a personal loan:
- Set your goals and make a plan to achieve them. How does your debt play into a broader personal financial plan?
- Live and borrow wisely within your means.
- Consider a protection plan. If something happens to you or your income, this allows you to continue to make your loan payments.