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There are many reasons why you might want to borrow money. Maybe you want to make a significant purchase, such as a used car. Maybe you are looking at investing in something or renovating your kitchen. You might be looking at a way to fund your education or pay for an emergency, like a leaky roof. If you don’t have the cash on hand, a personal term loan might be the way to go.
When it comes to borrowing money, you have a variety of choices. Most big banks and other lenders have a set of similar options available, but they may have slightly different terms, interest rates, fees, and penalties. You’ll want to shop around to find the one that suits your needs the best.
What is A Term Loan?
When you negotiate a term loan, you borrow a specific amount of money and pay it back over a set amount of time by making regular payments. If you select fixed-rate interest, your interest rate never changes. If you go with a variable rate, you’ll likely start at a lower rate, but it could fluctuate. If this happens, you’ll pay a little less principal and your loan will take longer to pay off. Either way, your monthly payment will always remain the same.
For more information about variable and fixed-rate loans, read this.
A term loan is a great option for any consumer looking to borrow money, but of course, it’s not the only option out there. Here are two of the other most common ways to borrow money when you find yourself in need of some extra cash.
A Line of Credit
A line of credit can be secured or unsecured and allows you to access funds with cheques, debit cards, bank machines (ATMs), and online banking. You will have a credit limit and be able to borrow as much or as little as you need, and repay as you are able, according to your cash flow.
You can choose from several different lines of credit, from home equity lines to student lines, based on your specific needs. You can choose between fixed and variable interest rates on lines of credit. Payments will be different each month, depending on interest rates and the amount of credit you have used. If you don’t borrow, no payments are necessary.
Look here to learn how to borrow using your home equity.
When you apply for a credit card, you are given access to funds up to a set limit. You can use these funds for a variety of purchases or cash advances, but you will want to repay them quickly. Credit cards usually have much higher interest rates than other borrowing options, although a lower interest card may be available through your lender. Credit cards are usually issued without a lot of red tape and often offer valuable rewards like travel miles, cash-back options, or points for groceries, fuel, or other purchases.
For a list of the best Canadian Aeroplan credit cards, click here.
How is A Term Loan Different from Other Forms of Financing?
While an easy and affordable term loan is almost always a good option, there are some cases when another form of financing is better suited. This is why it is so important to compare your options and do some research before you make your final decision.
A Line of Credit vs. A Term Loan
If you know how much money you will need, you can get a personal term loan and spread the payments and interest out equally over a specified period. If you are not sure how much to borrow, or you think your needs may be ongoing, a line of credit might be a better option for you as it allows you to continue to access funds and pay off your balance as required.
A Credit Card vs. A Term Loan
Credit cards usually have a 30-day grace period. If you pay off your balance each month, you will not incur any interest. On the other hand, a personal term loan has the interest built right into your payments from the start. If you need to pay for something quickly and know that you’ll have the cash within 30 days, a credit card could be the best option for you. Just make sure you don’t overcharge your card to continue to carry a balance from home to home, this will end up making your purchasing significantly more expensive than you had originally planned for.
Read this to find out what happens when you stop paying your credit card bills.
Both a line of credit and a credit card are always open, so you will never need to reapply unless you cancel the agreement with your lender or default on your payments. When you are finished paying off a personal loan, the agreement comes to an end. If at that point, you need more money, you will need to reapply. Whichever form of credit you choose, it’s important to borrow responsibly and make sure you can afford the payments.
Got an expense that needs taking care of? Try using a short-term loan.
What if the Bank Doesn’t Approve My Application?
Banks often have stringent requirements for personal loans. They want to ensure that you will make your payments, regularly and on-time. If you have a low income, poor credit, or have filed for bankruptcy in the past, you may be seen as high risk and your loan application may be rejected.
Filed for bankruptcy? Look here to learn how to rebuild your credit.
Online lenders may be an option if you are having difficulty obtaining a loan at the bank. Online loans require less paperwork and tend to be approved more easily and more quickly. If you have credit issues though, they may come with higher interest and more fees. Whenever you borrow money, make sure you understand the terms of your agreement. Check the fine print carefully so you can prepare ahead for unexpected costs.
To learn how to qualify for a personal loan, click here.
What If I Want to Pay My Term Loan Off Early?
There are many different repayment options for loans. Most loans are set up with monthly payments, but you can make more frequent payments to reduce your loan period or your interest amount. If you end up increasing your income or obtaining money from an unexpected source, you might be tempted to eliminate your debt early.
Can’t make your loan payments on time? Read this.
With lines of credit and credit cards, early repayment is always possible. These types of financing are typically meant to be short-term and used on an as-needed basis. You can pay off the amount you owe, at any time, with no penalties. In fact, it’s always in your best interest to pay off these types of financing right away so that you don’t have to pay too much interest.
As for term loans, prepayment is also typically a good idea as you’ll save on interest. But, it’s always very important that you ask about your lender’s specific prepayment penalties before you decide that you want to pay off your term loan early and even before you sign your contract. Conditions, fees, and penalties vary by lender and by the type of loan, this is why we can’t recommend enough that you ask questions and read your terms carefully.
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