As you move through life, you’re bound to encounter many different kinds of expenses. From necessary items to financial emergencies, it can all start to add up. On top of that, urban areas like Markham have become relatively expensive places to live in recent years.
When those types of expenses come up, it’s often a better idea not to rely solely on your credit cards to get you through. Sometimes, it’s good to have a backup plan, otherwise known as a personal loan.
Common personal loan application mistakes everyone should avoid, click here.
Credit Cards Vs. Personal Loans
When applying for credit products, you’ll usually have a choice to make; whether you prefer to withdraw from a revolving line of credit as you need or have access to a fixed amount of money with an adjustable repayment term.
While both credit types can help cover most of your daily living costs, they may also be wrong for certain financial situations. That’s why it’s best to be as informed as possible before you sign any papers. Below, we’ve included two of the most common credit products that fall within the revolving and fixed credit categories.
The first credit product that most people apply for is the credit card. Not only are credit cards relatively easy to get approved for and use, but they are also one of the fastest ways of building a credit history and a perfect example of revolving credit in general (for more information about revolving credit, check out this article).
In this case, your credit card issuer will approve you for a set credit limit. As mentioned, you can withdraw from this limit in whatever amounts you need, then pay off your outstanding balances on a monthly basis.
Typically a credit card is the best option for your everyday costs, as well as small-scale financial emergencies and necessary expenses like:
- Groceries and household supplies
- Basic repairs/maintenance of your vehicle or home
- Memberships and subscriptions
- Smaller travel costs (train tickets, souvenirs, etc.)
- Gifts and entertainment (concerts, restaurants, etc.)
Credit cards are also a good option if you want various perks, such as roadside assistance, travel insurance, and reward points. In addition, you’ll be able to make minimum monthly payments and will only need to pay interest on your unpaid balances. If you don’t use the card, you won’t be charged anything from month to month (with the exception of some specialty cards, which cost a yearly fee).
However, when used improperly, credit cards are also one of the easiest ways to rack up consumer debt. Defaulting (late, short, and missed payments) can lead to some hefty penalties. Although minimum payments can spare you from any late fees, the interest you pay on your remaining balances can be highly expensive. Not to mention, the more money you owe, the further your credit score will drop.
Essentially, credit cards are only a healthy choice if you have smaller expenses to cover and can afford to pay the majority of your balances responsibly.
As mentioned, a personal loan is a fixed amount of money that you can apply for through a bank or other lending institution. Once your application has been accepted, the loan sum that you’re approved for will typically be sent to your bank account via direct deposit, though some lenders also offer cheques and e-transfers.
Before the personal loan is deposited, you and your lender will work out a plan for you to repay the borrowed funds through equally divided installments over several months to several years.
This makes a personal loan a more effective option for expenses that don’t occur as frequently and larger-scale emergencies, including but not limited to:
- Tuition, books, and other educational costs
- Full vacations and unexpected travel costs (medical bills, hotels, etc.)
- Larger purchases (furniture, appliances, etc.)
- Extensive repairs/maintenance to your vehicle or home
- Floods, fires, and other more significant emergencies
Depending how much money you borrow and how qualified you are to handle it, your personal loan repayment plan can often be adjusted and may even allow for lump-sum payments, which would help pay your debt down quicker. Many lenders will also give you a fixed interest rate for each installment.
Since your rate will not change throughout your plan, this makes the overall costs of a personal loan easier to calculate and budget for. Like credit cards, personal loans are also good tools for building and diversifying your credit report. Once again, the more responsible payments you make, the healthier your credit will become.
That said, a personal loan can be a much more significant responsibility to take on than the average credit card. Firstly, you will have no choice but to complete your repayments as they are scheduled. There will be no minimum payment option and every installment you default on will gradually ruin your credit.
In the end, a personal loan is only a healthy alternative if you can prove to your lender that you have the ability to complete your repayment plan accordingly. Otherwise, your application may be denied or, at the very least, lead to a much more expensive loan.
How to find the best personal loan for your needs this year, click here.
How to Obtain the Best Approval Results
Remember, applying for a personal loan is all about your ability to display solid financial strength. After all, the more qualified you are, the more money you can secure, the less interest you’ll pay, and the more negotiable your repayment plan will be.
This is particularly true when it comes to banks or other prime lenders, where approval standards are more strict than with subprime institutions (alternative, private, bad credit lenders). While subprime lenders have less difficult standards to pass, the personal loans they offer are generally smaller, less adjustable, and more expensive due to higher interest rates.
Either way, if you’re going to apply for a personal loan, it’s important to strengthen your finances and prepare for the application process by taking some precautionary measures, such as:
- Shop around for the right lender (do your research)
- Have steady employment and save as much income as possible
- Take on a second job or work extra hours (if your income is insufficient)
- Pay off any existing debts
- Keep your credit score above 650
- Regularly check your credit report for errors, fraud or identity theft
- Create a proper budget and avoid unnecessary expenses
- Finding a cosigner (optional but helpful)
- Offering up an asset as collateral (loan security = better results)
Check out this infographic for a detailed look at how your credit score is calculated.
Personal Loans and Your Credit Score
Your credit score is a 3-digit number ranging from 300 – 900 and is assigned to you by Canada’s two main credit bureaus (Equifax and TransUnion) when you first become a credit user. Since this score is a basic representation of your credit health, many lenders will take it into account during their personal loan application process.
It’s better to have a good credit score within the 650 – 900 range before you apply for a personal loan because this typically means that you are and will continue to be a responsible credit user. As a result, you can often access more credit at a better rate and have more negotiating power when it comes to your repayment plan.
Can you get a loan with a credit score of 450? Find out here.
The Effect of Bad Credit
Unfortunately, the results will be much worse if your score is within the 300 – 600 range, which is a sign of bad credit. This may simply be due to poor financial habits, such as continually defaulting on your repayments. It can also occur if you’ve fallen victim to identity theft, have an uncorrected error on your credit report, or have recently experienced delinquency, such as a consumer proposal or bankruptcy.
No matter the cause, most lenders will consider you too risky to approve, at least for large and reasonably priced loans. Nonetheless, even a bad credit personal loan can help elevate your credit score, as long as you apply with a lender that reports your progress to the credit bureaus and make all your repayments as scheduled.
How to Find a Personal Loan in Markham
If you’re looking for a favorable personal loan in the city of Markham, rest assured that Loans Canada is on the case. All you have to do is contact us for more information or apply below when you’re ready. Personal loans have never been easier!