8 borrowing options

1. Credit cards

With credit cards, there are hundreds of options to choose from. The features offered and the interest rate will vary from card to card. If you pay off the balance in full each month, you won’t pay any interest.

2. Overdraft protection

This covers a short-term cash shortage in your bank account. It also covers NSF (not sufficient funds) cheques. You may pay a monthly charge for this service, or you may pay only when you need to use the service. You will also pay interest on the money you borrow. These interest charges can be high.

3. Personal loan

You can get a term loan or line of credit from a bank, trust company, credit union or finance company. With a term loan, you repay the loan over a fixed period of time at a fixed rate of interest. With a line of credit, you’re pre-approved to borrow up to a set limit. You can borrow and repay at any time, as long as you make the minimum monthly payment.

4. Mortgage

This is a long-term loan you get to buy a home. With a mortgage, interest rates are lower because your home secures the loan. You have different options for how and when you repay the loan.

5. Home equity loan

You can borrow against the money you have invested in buying your home. The more you’ve paid down on your mortgage (your equity), the more you can borrow. Again, interest rates are often lower because your home secures the loan.

6. Lease

A lease is a long-term rental on a product, such as a car. It works a bit like a loan. You make regular payments at a fixed rate of interest. The payments are usually lower than payments on a loan for the same term. The big difference is that at the end of the lease, you don’t own the product. But you may have the option to buy the product for what it is worth at the end of the lease.

Many leases set special conditions you must meet. For example, a car lease can limit how many kilometres you can drive each month.

7. Borrowing from your RRSP

Through Canada Revenue Agency’s Home Buyers’ Plan and Lifelong Learning Plan, you can borrow money from your RRSP without paying tax to buy your first home or pay for education. However, when you borrow from your RRSP, the money you take out of the plan won’t be growing tax-free for your retirement and you will have to pay it back.

8. Borrowing against your RRSP

In some cases, you may be able use money in your RRSP as collateral for a bank loan. This may not be allowed depending on your bank policy or RRSP administration agreement. Make sure you get expert advice from a tax planner or financial advisor before you go ahead. If you don’t follow the rules, you’ll have to pay taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition on the RRSPRRSP See Registered Retirement Savings Plan.+ read full definition money you use as collateralCollateral Property or assets that you pledge as a borrower as a guarantee that you will repay the loan. You may lose your collateral if you don’t pay back your loan.+ read full definition.

Key point

The right 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 option depends on why you’re borrowing. For example:

  • if you need to borrow a small amount of money for a short time, look into a personal loan or a line of creditLine of credit An account that you set up with a financial institution (often a bank) to borrow money. It lets you borrow what you need, when you need it, up to a certain limit.+ read full definition
  • if you’re buying your first home, look into borrowing from your RRSP under the Home Buyers’ Plan

Caution

If you don’t pay back your home equityEquity Two meanings: 1. The part of investment you have paid for in cash. Example: you may have equity in a home or a business. 2. Investments in the stock market. Example: equity mutual funds.+ read full definition loan, the lenderLender Any person or organization that lends money.+ read full definition can take your house or other property.

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