6 questions to ask before you borrow
1. How much will you pay each month?
Take a look at your budgetBudget A monthly or yearly estimated plan for spending and saving. You work it out based on your income and expenses.+ read full definition to make sure you can afford the monthly payment. Look at your gross debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition service ratio (GDSR). This is the percentage of your gross monthly income that you need to pay your basic housing costs. If your GDSR is higher than 32%, you may find it difficult to cover other expenses.
2. What is the total amount you’ll repay?
Find out how much the loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition will cost when you add up all the interest you will pay, as well as all of the money you borrowed. The interest rateInterest rate A fee you pay to borrow money. Or, a fee you get to lend it. Often shown as an annual percentage rate, like 5%. Examples: If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest. It uses your money until you need it back.+ read full definition will depend on the type of loan. Some interest rates are fixed for the whole termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition of the loan. Others may go up and down as the Bank of CanadaBank of Canada The central bank that sets Canada’s money policies. These policies help keep the Canadian dollar stable. They also affect our economy and our money supply. The goal of the Bank of Canada is to keep currency and the financial system stable. They are the sole authority to issue banknotes – bills.+ read full definition rate changes.
3. Is the loan secured?
The interest rate on a secured loan will often be lower than an unsecured loan. But if you don’t pay back the loan, the lenderLender Any person or organization that lends money.+ read full definition has a legal claim to whatever you use to secure the loan. That might be your home, your car or other property.
4. How long will it take to repay the loan?
This is the loan term. The longer the term of your loan, the more interest you will pay (if the interest rate stays the same). Find out if there is a penalty for paying the loan off early. Some lenders charge a fee if you make extra payments, or repay the whole loan early. Others offer more flexible optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition.
5. If you miss a payment, does the interest rate change?
With some loans, the interest rate might increase by 2% or more if you don’t make a payment by the due date.
6. Do you have to pay for any insurance?
Your lender might require you to insure your loan. This means the lender will make your monthly payments if you can’t for specific reasons, such as getting sick and being unable to work. If loan insuranceLoan insurance Insurance that pays your loan payments if you lose your job or become sick or hurt and can’t work.+ read full definition is optional, find out how much extra it will cost and what it will cover. You may decide you don’t need the insurance.
Key point
Only borrow what you can afford. If your gross debt service ratio is higher than 32%, you may find it difficult to cover other expenses.