Reducing your borrowing costs

5 quick tips to reduce your borrowing costs

1. Borrow only when you need to

In some cases, borrowing makes sense. But there’s always a cost: the interest you pay. In general, borrow only when you need to – and to pay for things that have lasting value or the potential to go up in value.

2. Borrow only as much as you need to

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.

Also take a look at your total debt service ratio (TDSR). This is the percentage of your gross monthly income that you use for housing and other outstanding loans and debts. Most financial institutions won’t grant you a 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 if your TDSR is above 40%.

3. Shop around for the lowest interest rate

If you’re making a major purchase, like a house, a fraction of a per cent can save you thousands of dollars. Make sure you know the right questions to ask before you borrow.

4. Plan ahead

It’s often easier to negotiate a lower 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 when you have time on your side. It may also be easier to get approved for certain types of loans, like lines of credit, before you may need them. Another idea is to get a pre-approved mortgage if you know you’re going to buy a house.

5. Pay down your debt quickly

The faster you pay off the principalPrincipal The total amount of money that you invest, or the total amount of money you owe on a debt.+ read full definition, the less interest you’ll pay. For example, paying down your mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition biweekly rather than monthly can save you a large amount of interest. On the other hand, if you miss a payment, your interest rate could go up and you could damage your credit rating.

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Use this calculator to figure out how long it will take to pay off credit cards and other debt.

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