It’s fair to say that loans are a simple enough concept – you agree on an amount of money to borrow from a lender, and you pay it back with interest over an agreed upon period of time. But once you start digging into options, comparing deals and deciding on the type of loan you need, the once simple concept starts to seem more and more dreadful and complicated.
The good news is that we got you covered. Below you’ll find all the basics you need to know to understand loans. So, read along, bookmark it for a later date, email it to yourself or jump to the sections that interest you most:
We know. Taking out loans isn’t new. And to say that most Canadians need to take out a loan over the course of their lifetime would be a blatant understatement. However, it is important to note the reasons behind why loans are taken out. This way you can choose the type of loan that caters to your needs.
Auto loans are the most popular type of loan taken out in Canada. Whether it’s to lease or finance a new or used vehicle, most people can’t afford to pay for it in cash. This is where an auto loan comes in handy, allowing consumers to pay for their purchase in affordable installments.
Buying a home is one of the most life-changing moments and one of the most expensive moments in someone’s life. Getting a mortgage is one of the only ways many Canadians can afford to purchase their own residence.
Student loans are another popular loan taken out by Canadians looking to afford a post-secondary education. Whether it’s one course or four years of studies, many student loans allow you to hold off paying until you finish your degree.
With $1.973 trillion in consumer debt, it’s no surprise that many Canadians choose to consolidate all their debt into just one loan. This is a popular option as it provides consumers with the convenience of paying for one loan at a time, as well as, allowing them to achieve a better interest rate in the long run.
Unfortunately, unforeseen medical expenses are another category that can require a loan. Unplanned emergencies can be costly and often require paying the doctor over a set period of time.
Owning a home comes with a set of responsibilities. Whether you need to repair the roof or update the kitchen, taking out a loan to tackle the home improvement project is often a necessity.
Vacations and getaways are the final reason on our list. As this can be costly for a lot of families, choosing to finance the vacation using a loan is common amongst Canadians. This allows them to pay for their vacation upfront when the time is right and pay for it later.
Now that you understand why people borrow, it’s helpful to have an overview of the types of loans available. All loans are broken down into two categories:
A secured loan has a form of collateral attached to it. For instance, when you take out a mortgage to purchase a property, the property can be repossessed if the mortgage isn’t paid. Another example of a secured loan is an auto loan. These types of loans are popular because they are less risky. Lenders have something of value to rely on if the loan is not paid.
Unsecured loans are the exact opposite in that there is no collateral secured to the loan. An example of these would be credit cards, lines of credit, personal loans and overdrafts. These types of loans commonly have much higher interest rates as they carry a higher risk to the lender.
Looking back on the reason you need a loan will help point you to the type of loan you require. If you’re looking to purchase a home or a vehicle, a secured loan with a lower interest rate is the way to go.
For ongoing expenses such as vacations, tuition, medical bills, home renovations and debt consolidation, an unsecured loan may be the right choice for you.
Simply put, interest rates are the cost of borrowing money. When it comes to buying a new home or vehicle, borrowers are looking for the lowest interest rates possible. But how are these rates determined? Let’s take a look:
What determines interest rates?
According to the Canadian Bankers Association, there are several factors that affect interest rates. These are:
- Rates of inflation
- Market forces
- Monetary policy’s
- Demand and supply of money in the economy
This means that when investors have less money to lend, the cost of borrowing goes up. This, in turn, translates into higher interest rates. Alternatively, when there are more investors than borrowers, interest rates go back down.
What affects the interest rates?
Length of the loan:
Short-term loans (up to a year) usually have lower interest rates as it is easier for the investor to protect their investment against unforeseen market conditions.
A long-term loan (over a year) often comes with higher interest rates. This is because lenders can not predict future market conditions and want to avoid losing money on their investment.
Your credit rating and record of repaying previous debts is another important factor that will affect your interest rate. If the lender feels that the loan is in any risk of getting repaid, the more interest they’ll charge. For more about credit and how to repair it, see How to Fix Bad Credit and Improve Your Credit Score.
This refers to a general increase in prices over time or the percentage of which something increased or decreased over a specific period (usually over a month or a year). For example, if you were to borrow $7,000 from a lender and over the next couple of months the prices increase by 3%, the lender is losing out on potential revenue. For this reason, lenders often add an inflation rate to the interest rate that you are paying.
A down payment refers to the initial payment made when you purchase something on credit. This is usually a portion of the purchase price and comes out of your own savings. Down payments are often used when purchasing big-ticket items, such as a home or vehicle. When you see “zero down” offers, this means that no down payment is required during the purchase. However, when it is a requirement, the cost covers a percentage of the total purchase price. Let’s look at the benefits of choosing a big or small down payment:
A bigger down payment often means lowers interest rates and lower monthly payments on your purchase. This is because borrowing less money decreases the risk factor for the lender. This risk factor is determined by how easily and quickly a lender can get their money back. Smaller monthly payments are also helpful when it comes to saving for future expenses, as well as making it easier for you to qualify for additional loans should you need them.
A smaller down payment allows you to purchase the item sooner without having to save for decades at a time. Leftover savings are also beneficial in case of an emergency, as you won’t have all your money tied up in the purchase. Additionally, the funds can be saved for other purposes and future big-ticket items.
The decision to go big or small is completely dependent on each individual’s personal situation. The idea is to keep payments affordable while being able to set aside an emergency fund in case of things going awry.
In Canada, a credit score can range between 300 and 900 points. The two most trusted sources for checking your credit score are Equifax and TransUnion. Both offer a free report once a year. It is recommended to order both reports as each company keeps separate information on file. Due to this your score may vary between the reports. By ordering both you will be able to tell if there is a mistake in your credit that needs to be addressed or taken care of.
Now that you know the type of loan you’re looking for, it’s time to find a reliable loan. For big-ticket items such as a mortgage, most Canadians refer to banks or credit unions. It is important to speak with different representatives and institutions and compare the interest rates. After doing this you will be able to choose the one that fits comfortably into your lifestyle.
Companies like Northwood Mortgage or Mortgage Approval Canada are great for those with bad credit who are looking for private mortgage investment solutions. The same applies, having multiple options and being able to choose a budget-friendly solution is both helpful and important.
For smaller ticket items, such as vacations and tuition, both banks and private lenders offer funds that are often much lower in interest than credit cards and only collect interest on the amount borrowed. For these, your best resource is the internet, look at reviews, compare lenders and find a budget-friendly option that you know you’ll be able to repay.
If you’re looking for a reliable auto loan because a dealership rejects you for having bad credit or no credit, don’t be alarmed, you can still get approved for a car loan. At Cheap Cars Canada, we believe that every Canadian deserves to own a vehicle, regardless of their credit situation. Since 2008, we have been helping people with no credit or bad credit secure manageable automotive loans.
With the largest network of dealerships across Canada and thousands of vehicles to choose from, we are transforming the way Canadians buy their vehicles.