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Loan Basics

Loans can be effective financial tools to help you achieve your goals, but they must be used wisely. If you’re thinking about borrowing money, consider your options carefully.

Secured loans

Secured loan is when you offer something as security in return for the money you borrow as collateral – such as property, your deposits or other assets. This offers lower interest rates than unsecured loans. However, banks or other lenders can claim your asset if you default on your loan repayments

Guarantees and sureties

If lender is unsure about your ability to repay the loan, they ask for a surety/guarantee, a legally binding agreement that a third-party (usually a person or a company) accepts responsibility for the loan if not paid. This third party is known as a surety/guarantor. If the surety fails to meet the obligation, the lender has the right to take legal action against the surety.

Unsecured loans

With an unsecured loan, you borrow money without collateral. Interest rates for unsecured loans are higher than secured loans because you are not offering any security to the lender. Credit score is taken into consideration when applying for unsecured loan, and your score suffers if you have trouble with repayments.

Fixed vs. floating interest-rate loans

Floating-rate loan – A loan with an interest rate that rises and falls – or floats – with market interest rates. The interest rates for most floating-rate loans change in accordance with the prime rate.

Fixed-rate loan – A loan with interest that remains fixed for the loan’s entire term, regardless of market interest rate fluctuations. Some people prefer this type of loan because their payments will remain the same throughout the duration.

Interest rates of loan products

Interest is usually the main cost of taking out a loan. Depending on the types of loans, there are different commonly used basis on which interest is calculated in the market, monthly flat rate or annual rate for personal instalment loans and daily or monthly compound rate for credit card outstanding balance.

Repayment terms

Set a period of time to repay the money, typically from 6-48 months. If you choose a longer repayment period, you will reduce the size of the monthly payment, but increase the total amount of interest payment. Your repayment period can affect the interest rate of the loan.

Documents for loan application:

Banks/lenders will require documents to support loan application.

>Permanent Resident Identity Card

>Proof of income – latest payroll slip, bank statement or passbook listing your name, account and salary.

>Proof of residential address, such as a utility bill or bank statement.

 

Fees and charges

Lenders are required by law to publish their fees. Be aware of common fees and charges when borrowing:

>Processing fee charged by banks or financial institutions for a loan

>Early repayment charge: The bank charges extra fee if loan is paid earlier than the agreed term.

>Late repayment charge: If monthly repayment is overdue.

>Cancellation fee: Cancelled loan after signing the contract.

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Loans – Responsible Borrowing

Borrowing may be a convenient way to purchase something that you would otherwise take a long time to save up for. In the case of buying a home, for example, a mortgage allows you to live in your home while you pay it off.

Whether you’re planning a big purchase like buying a car, getting married or need extra cash to deal with family emergencies or pay for education, sometimes borrowing may not be the best option for you.

 

Can you afford to borrow?

 

Before you decide to borrow money, it’s worth taking the time to ask yourself a couple of key questions below, and to make sure you can afford new debt repayments on top of your current expenses or commitments.

 

– What are you borrowing the money for? Make sure it is IMPORTANT!

– Is borrowing your best option? There may be other ways to achieve your goals, TAKE ON EXTRA JOBS!

– How much should you borrow? Borrow what you can ONLY AFFORD TO PAY!

– What is the cost of borrowing money?  Check the BEST INTEREST RATE!

Before borrowing, consider the following:

. Do a budget to work out your monthly spending, savings and loans.

– Allow to have emergency funds in case you lose your job, illness, or in any emergencies.

– Borrow what you need and what you can comfortably repay, regardless if you are qualified for a higher loan amount.

– Make your payments on time to avoid penalties and pay off your debt quickly to minimize total interest payments.

– Avoid unnecessary multiple sources of credit to keep an easy track of repayments.

Situations when you should avoid borrowing:

> Problem paying everyday expenses. If you have trouble paying for daily necessities, borrowing money could put you into debt.

> Covering optional spending. If you can put off an optional purchase until you’ve saved up the money, you will avoid interest charges altogether.

> Borrowing because to settle other debts. If you’re already deep in debt, going further into debt is probably not the best solution.

Risks of borrowing too much:

Borrowing too much can leave you struggling financially as you plunge deeper into debt. Be careful about borrowing too much.

 

> It draws money from other important needs. If you borrow money, you have to pay interest. Money that goes towards interest payments can’t be used for other purposes, such as paying down your mortgage or meeting other obligations.

> Your credit score can suffer if you can’t pay your bills. Falling behind on your payments means it will be increasingly difficult to borrow more money for future needs. Find out more about your credit score and how it affects your borrowing.

> It can lead to higher interest payments. Lenders may charge higher interest rates on subsequent loan applications if you are already carrying a large amount of debt.

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Help with Loans

PERSONAL LOANS

If you want to borrow money and pay back an amount every month, a personal loan is one option.

 

What is a personal loan?

Personal loans are loans that a bank or other lender makes that are not secured against any asset such as your property. They’re also known as unsecured loans.

 

Personal Loans – The Pros

> Able to borrow more than with a credit card

> Loan repayments may be fixed amounts. That means your repayment amount is going to be the same every month and it’s easier to budget.

> The interest rate you pay on a personal loan is also usually fixed (but not always).

> You can choose how long you’d like to take to repay the loan. Remember the length of a loan will affect the amount you are charged in interest.

> You can consolidate several debts into one personal loan, potentially reducing your monthly repayment costs. But be careful, as this may mean extending the length of the loan and so paying more overall.

 

You can make over-payments or pay off a personal loan in full before the end of your agreement without penalty.

 

Personal Loans – The Cons

x Personal loans have higher rates of interest than some other forms of borrowing, particularly if you want to borrow a smaller amount, such as £1,000.

x Because the interest rate may reduce the more you borrow, you may be tempted to take out a bigger loan than you need.

x Older loans (taken out before 1st February 2011) normally have an early repayment charge if you want to pay off your loan early or overpay.

 

Personal loan cooling-off period:

There is a 14-day cooling-off period from either the date the loan agreement is signed or when you receive a copy of the agreement, whichever is later. If you cancel, you have up to 30 days to repay the capital and interest.

 

What to watch out for in a personal loan:

Get the interest rate advertised with the loan, which is known as the representative APR (or annual percentage rate). This is the rate that you will see on posters or banks’ websites, but not everyone will qualify for it. In fact, loan providers only have to offer this rate to just over half (51%) of borrowers they lend to. If your credit rating is less than perfect, you may be accepted for a loan but charged a much higher rate of interest than the representative APR. Your application for a personal loan will not necessarily be accepted.

 

Secured Personal Loans

If you own your own home, you may be tempted to consider a secured loan.

However, this is a riskier option as your home is secured against the money you borrow.

This means that if you can’t repay the loan, the lender could force you to sell your home to pay off what you owe.

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Ways To Get the Lowest Interest

If you ask few bankers how to get the best interest rate possible, you don’t have to wonder any more. Here are several tips by ex-bankers on how to get the lowest interest rates.

> Make yourself an ideal client – Banks and credit union are in the business of lending money, but they want to get something out of the big risk they are taking. Here’s what you can do:

– You must have a stable job that freely sustain the funds you are borrowing.

– Look like a stable person. Stay with each of your employers for at least two years.

– You have business potential from your bank’s perspective.

– Be open to a long term relationship with your bank if they are good to you.

– Make sure you pay your bills and maintain good credit.

 

> Polish your credit report – Make your credit a satisfactory to the banks/credit unions.

– Obtain a copy of your credit report.

– Check your credit report for error.

– Fix derogatory information.

– Pay your bills on time.

– Don’t apply for credits too often.

 

> Give your banker reason to give you his best rate – Banks/union credits are out to make money too, so  need to give him some good reasons to give you a good. Here is a list of the kinds of reasons that will help you with bankers:

– You are looking at moving your banking with them.

– You have a real good credit.

– You are part of an important connection to that branch.

– You have banked there for many years.

 

If your banker doesn’t know your history with his bank/credit union, let him know what a good client you have been over the years and how you appreciate the fact that they have been good to you (make sure that you only speak the truth. Your bank can quickly verify your story).

> If you find an awesome banker, stay with them. – Good bankers can be worth their weight in gold (well almost). If you happen to get a fantastic banker, try to stay with them for as long as you can. A good banker will take good care of you and make sure that you always get the best deal, or they can give the best deal if you chose to take them up on their offer.

> Shop around for the best interest rate. – Check out different banks and credit unions to see what interest rates they offer. Tell them you are applying for a loan or mortgage and ask to speak with a loans officer, and you are looking for the best rate and ask them what their best rate is. When you go rate shopping, don’t fill out credit applications, it will waste your time and the loan officer’s time if you are not qualified or decided in availing the offer.

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Why Save Money, Even When Borrowing is Cheap & Easy

Credit so easy to access, why save money and buy with cash? If you want something, you pull out the plastic and then pay it back who knows for how long. If you can afford the monthly payments, everyone does that; what’s the big deal? The unfortunate thing is that this sort of thinking is making sense to too many people these days.

Here are reasons why you should save:

> Financial Independence – The notion of “being rich or wealthy” means to most people is having financial independence and savings to depend on. Calling your own shots, financially speaking, means having the freedom to make choices in your life separate from earning a pay cheque.

> Save on Everything Bought, (Groceries, Home, Car) – With savings, you can practically buy everything with cash on hand, this means, you save up on credit and mortgage interests. You can also prioritize where you funds are going, and learn to appreciate how it feels to be debt-free.

> Get Out of Debt – Once you saved up, paying of old debts will unburden you with unnecessary stress and depression of paying off.

> Annual & Unforeseen Expenditures, Emergencies – Funds for family needs, education, vacations, vehicle  and house repairs, and other emergency concerns that requires cash out.

> Losing a Job or Inability to Work due to Ailments – Having buffer funds in cases that you are suddenly out of job or an ailment requires you to stay home. Savings will keep you afloat until such time that you are back on your feet. Any of these things can happen to you. Employment Insurance (EI) doesn’t kick in until you have been unemployed for 6 weeks. Do you have enough savings to tie you over or will you be living on credit? Living on credit during a time like this can quickly make a bad situation worse.

> To Have a Good Life – There are huge emotional, psychological and physical consequences to always living stressfully, from hand to mouth, pay cheque to pay cheque. People who don’t plan for their future seem to run from “crisis” to “crisis.”

Being organized isn’t going to make you happy all by itself, but it can sure help. There’s so much in your future that you cannot control, putting aside funds to spend when you need it is actually organizing and taking control of your future and financial affairs.

Start Your Emergency Savings Fund Right Away!

Start today by setting aside a little money each pay cheque until you have an emergency savings fund of $500 to $1,000. If you receive a bonus from work or an income tax refund, use that to get you started or to add to what you’ve already got set aside. As life happens and you need to dip into your fund, build it back up. It takes a bit of work, but it’s a habit worth getting in to.

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Most Effective Ways to Get Out of Debt

We’d love to pay down our debt or get rid of it altogether, but we aren’t quite sure of the best way to do it. There really isn’t any one “best way” that works perfectly for everyone. Here are few suggestions to get started, if these are achieved, the faster to get out of debt.

Pay More Than the Minimum

Always pay more than the minimum payments. Paying minimum credit card installments takes forever to pay off balance. Paying off balance quickly, saves lots of interest money.

Spend Less Than You Plan to Spend

We get into, and stay in debt because we only buy the “wants”. Want something? Buy it with available cash. If you can be satisfied with less than you would ideally want, then you can use the money that you are saving to put towards other financial priorities.

- Pay Off Your Most Expensive Debts First

Make minimum payments on all debts and credit cards, except for the debt that has the highest interest rate. Choose the one debt that is charging you the most interest and focus all of your extra payments on paying that one off first. This strategy, sometimes referred to as the snowball method, will get you out of debt quickly, and you will feel encouraged as you see your progress.

Reduce on Car Mortgage and Household Expenses.

Consider purchasing a second-hand car that’s in good condition, this will reduce expenses on mortgage and interest. One-car-policy in the family is also a good consideration.

Save up on groceries and other household items by stock-piling on non-perishable items when they are on sale.

Get a Second Job and Accelerate Debt Payments

Having extra jobs converts to extra cash! This means your ability to pay faster on your debts.

- Track Your Spending and Analyze Where to Cut Back

Track your actual expenses—not what you should be spending over the course of a month. Once you know your spending habits, you should be able to identify areas where you can cut back. Allocate the money you “find” to paying down your debts.

> Get a Consolidation Loan

Ask your bank or credit union help you consolidate all of your consumer debts into one loan with one payment at a lower interest rate. Getting a debt consolidation loan will only help if you set your payment goals.

> Speak With a Credit Counsellor and Create a Spending Plan.

Speaking with a Credit Counsellor will help you pinpoint the weaknesses and strengths of your finances. You will be assisted on the best option to get out of debt. Credit Counsellor also helps create spending plan, a realistic one.

Some people don’t like budgets, but have they tried one? If you’ve lived all your life without a budget, how do you know you won’t like having one? After trying a realistic budget, most people agree that the alternative—being in debt—is much worse.

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Smart Things You Can Do for Your Finances

Have you ever wondered what the best things are that you can do for your financial future? Here is a list of the smartest things that anyone can do for their finances.

1.Create a Spending Plan & Budget – If you are spending more than what you earn, surefire that you are headed for financial trouble. Best way to make sure that your income is greater than your expenditures is to keep track of your expenses for a couple of months, then create your budget that is sustainable within your means.

2.Pay Off Debt and Stay Off Debt - Best thing you can do for your finances is to pay off all debts. Focus on your most expensive debt—the credit cards or loans that charge the highest interest. Once debts are all paid off, focus on paying your mortgage, consider splitting your monthly payment in half and paying bi-weekly. Then pay extra as you can afford it. This will shave years off your mortgage and save you thousands of dollars in interest.

3.Prepare for the Future – Set Savings Goals – Saving money for your future is crucial, make sure to work on it steadily.

> Start saving on a regular basis through tax free account (TFSA) or RRSP, or both.

> Plan for your retirement. Figure out how much money you will need for retirement, which may also be your “rainy day” fund in case of emergency.

>Make sure you have enough insurance, accidents happen, natural disasters occur, make sure you have enough o cover them.

> Write a will and who will benefit from your assets when you die, to ensure who will get the benefits of your hard work.

4.Start Saving Early, But Never Too Late To Start – Because of the magic of compounded interest, even when the rates are low, someone who starts to save for their retirement early doesn’t have to save as much as someone who starts saving later in life.

5.Do Your Research Before Making Major Financial Decisions – Many people don’t assess their priorities before buying an appliance than purchasing an investment or buying a home. Make sure that you’re not one of them. Buying a home and saving for retirement are two of the biggest financial decisions most people will ever make.

6.Don’t Be Hasty With Major Financial Decisions – There are no major financial decisions or major purchases that need to be made on the spot. It is better to wait and learn a cheap lesson, than hastily rush into something and learn an expensive lesson. Take the time to sleep on big decisions you have time to consider alternatives, and get some other opinions or information.

7.Stay Married!!! – Studies show that married people earn higher incomes, have twice the assets at retirement, and live on 25% less than what single people would need to live the same lifestyle. Statistically speaking, staying married is good for your finances.

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Managing Debt Wisely and Become Debt Free in Life

How to Pay-Off Your Debt Faster & Save Money | Paying Down Mortgages & Loans

 

Here are the most effective methods for paying off your debt fast and saving yourself some funds. These techniques save you the most money when used on mortgages (because mortgages involve big numbers and long periods of time), however, they can also be used to pay down other debts quickly.

Pay Bi-weekly Rather Than Monthly

Easiest way to pay your mortgage down faster is bi-weekly mortgage payments rather than monthly payments will reduce the time it takes to pay off your mortgage by several years. This payment arrangement will provide lesser interest rate on the outstanding balance and saves funds from the interest amount computed from the by-monthly cost.

Most people would never guess that making the equivalent of one extra mortgage payment each year could save so much money. If you want to be aggressive, you can pay weekly, but unless you’re super organized with your bank accounts and money, stick with bi-weekly payments to match your pay cheques.

Here’s a table to see how monthly, accelerated bi-weekly, and accelerated weekly payments compare.

Accelerated Mortgage Payments

Assuming a mortgage of $172,000 at 5% interest over 25 years
Type of Mortgage Payment Monthly Payment Accelerated Bi-Weekly Payment Accelerated Weekly Payment
How it works This is what lender determines that you must pay each month. Cut monthly payment in half and pay that amount every two weeks. Divide monthly payment into quarters and pay one quarter of monthly payment every week.
Payments $1,000 $500 $250
Years to pay off mortgage (Amortization) 25 years 21.4 years 21.4 years
Savings over the life of the mortgage $0 $21,536 $21,774

 

 

 

 

 

Round Up Your Payments

Round your payment up to the next large number. Paying any amount extra each month will help get debt paid faster.

Rounding Up Your Payments  
Type of Loan Mortgage Car Loan Credit Card
Original monthly payment $960 $373 $140
Rounded up payment $1,000 $400 $160
Reduced life of loan 25 years down to 23.2 years 60 months down to 56 9 years down to 6.6 years
Savings over the life of  loan $10,686 $389 $2,465

 

Putting It All Together to Pay Off Your Mortgage More Quickly

If you get aggressive with mortgage payments, round them up to a higher number and cut that number in half and pay it bi-weekly. Make sure that your budget can handle these larger payments. You may talk to your lender about creating a safety net to fall back on if you end up taking on more than you can chew. You can set up mortgage with the lowest payments and sign a voluntary payment option agreement to accelerate payments. If your finances become strained you can revert to a lower amount or the minimum that you’re required to pay. Be sure to check that you’re allowed to increase payments.

 

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