Getting a loan
A loan can be a helpful financial tool at key points in your life. But if it is not well managed, a loan can create stress and financial hardship. Understanding how loans work and knowing why you should (or shouldn’t) apply for one will help you make responsible choices.
Reasons to apply
A loan has advantages and disadvantages, so it’s important to think carefully and understand the consequences before applying for one.
- If you’re using the loan to take advantage of a great opportunity, enhance your wealth or improve your future, it may be a good idea. Examples might include buying a home, funding your education or contributing to your retirement.
- If you need the loan because you can’t control your spending, can’t meet your obligations for existing loans or want to take a chance on a risky or uncertain investment, it may not be a wise move.
How to apply
If you decide to apply for a loan, you’ll need to make an appointment with the lending specialist at your bank or credit union. The specialist will ask you questions about your financial situation and request documentation that helps them assess your ability to pay back the loan. This could be a letter of employment, paystubs or a rental agreement.
You should ask the specialist questions too.
- What payments do I need to make towards the loan?
- How long it will take to repay in full?
- Do I need a co-signer? (A person to share responsibility for repayment)
- What additional fees do I need to pay?
- Can I pay the loan off faster if I choose?
- If faster payment is possible, will I incur a penalty?
Types of loans
Different types of loans offer different benefits and drawbacks. You’ll want to choose the loan that fits your needs best.
A personal loan gives you a lump sum with a predictable repayment schedule. This type of loan requires you to repay a portion of the loan principal as well as interest with every payment.
- Ideal for: People who need a lump sum for a specific purpose, such as the purchase of an RRSP, a car or a holiday.
A consolidation loan enables you to pay off several higher-interest loans and replace them with a single loan with a lower interest rate. In addition to saving you money by lowering your interest rate, a consolidation loan also simplifies things: instead of managing repayments for multiple loans, you only have to worry about a single repayment.
- Ideal for: People who already hold several higher-interest loans, such as credit-card debt for multiple cards, car loans and rent-to-own furniture.
A line of credit is the most flexible type of loan, giving you access to money whenever you need it. The loan will always be available in your account, and if you don’t use it, you pay no interest. When you do need some extra cash, you can withdraw as much as you need whenever you need it. Depending on the line of credit you have you may pay just interest on the withdrawn amount or a portion of the loan principal as well as interest with every payment. This will continue until you pay it back in full into the account.
- Ideal for: People who need ongoing, short-term access to funds for emergencies, such as a home repair, overdraft or unexpected loss of income.
A mortgage is a loan designed to help you purchase a home or rental property. It gives you access to a larger sum of money—often hundreds of thousands of dollars—with a longer repayment period of up to 35 years. To qualify for a mortgage, you must be able to put some money on the property as a down payment. If the down payment is less than 10% of the property value, you will need to pay extra insurance costs.
- Ideal for: People who already have enough money for a down payment, and want to purchase a home or rental property.