Loans. Loans. Loans. See, we said it three times and nothing bad happened. Some people consider it to be a big bad L-word but the truth is lending can be a useful financial tool.
You might be wondering how borrowing money can help you get ahead. Everyone knows debt is bad, right? Not quite. There’s such a thing as good debt, believe it or not. Good debt can help you get out of bad debt quicker as well as help you invest in something that will pay off in the long run.
Benefits of Lending
Despite the not-so-fuzzy feelings many people have around loans, it can support growth in different areas of your life. It could also give you a second chance or help you get back on your feet.
Let’s say your house is due for a plumbing upgrade and you’re a little short on cash. Or you previously hit up the shopping mall one…two…three…too many times and now carry a big balance on your 21% interest credit card that needs to be paid off. Those are some of the instances people look to personal lending as a positive resource.
Different Types of Loans
There are many kinds of lending; loans for cars, schools, credit cards, and RRSP contributions—just to name a few. But here are the three general types of lending:
Line Of Credit
A line of credit (LOC) acts like a pre-approved loan that can be accessed through a chequing account. Essentially, you can tack $5,000 or more on to an account you already have. They generally have a much lower interest rate than overdraft protection (ODP). But unlike ODP, it’s ok to carry a balance on a LOC—as long as you’re using it for the purpose it was intended for and not those expensive pair of shoes you’ve been eyeing. With a LOC, you pay interest only on what you use.
Examples of when you might consider using a LOC are when your house is due for an upgrade, or you need to finance something that will pay off in the long haul. You should only use it when you need it. And when you don’t, just pretend it’s not there. You can also use it as a financial planning tool – but talk to the experts first so you know you’re doing it right.
If you own your home, a special kind of LOC called a Home Equity Line of Credit (HELOC) could be for you. It acts similar to a LOC but allows you to access the equity in your home. HELOCs are great for renovations, big purchases or even consolidating debt, all at a lower interest rate than a regular loan. Like a LOC, you can access it through your chequing account, debit card, cheques and in a branch, and you only pay interest on the amount you use. You can pay down the balance anytime and then use it again when you need to.
Overdraft protection is a safety-net. It’s a bit of extra money attached to the balance of your existing chequing account. As it’s not meant to be used often, it usually has a higher interest rate. So you’re not supposed to carry a balance on it for a long period of time. ODP can be as little as $500 or as much as $5,000.
You should never plan to use your ODP, but it can come in handy when payday is a few days behind your pre-authorized payments one month. For example, when ICBC withdraws their payment earlier than your employer deposits your pay. Or if the cheque your friend gave you is missing a signature and it bounces out of your account.
ODP is an emergency pillow that prevents your account from bouncing payments. It’ll save you non-sufficient fund fees and the headache of tracking down your unpaid pre-authorized payments.
Big expenses happen. And you won’t always have money in your pocket to pay for them. That’s where loans come in.
Unlike and ODP or a LOC, a loan is not attached to your regular bank account. It’s its own separate entity. The interest will be based on your application. It can only be used towards what it was originally intended for during the application process. There is a set payment schedule. So, usually, every two weeks or at the end of the month, you will be required to make a payment towards the balance you owe.
Examples of when you might benefit from a loan are when you’re purchasing a new vehicle. Or remember that 21% credit card we mentioned? Well, loans are a great way to consolidate your debt into one easy payment at a potentially lower interest rate.
Who can benefit from lending?
The short answer is anyone. Everyone has a different financial picture, so it depends on where you are in your life and the reason you’re looking for lending. That’s why it’s always best to review your money situation to determine the right borrowing solution for you.
Our lending team can help figure out what kind of loan is right for you and your situation. Call us at 1.888.517.7000 or get your application started online.