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In tough financial times, having the opportunity to obtain a loan can really help your financial wellness. Loans can help you in any personal, medical or family emergency where you may need a larger sum of cash, at once. An attractive benefit of obtaining is a loan is that you can pay them back in smaller amounts over an extended period of time. This can be monthly or weekly dependent on your lender and preference. 

We often see many Canadians obtain car loans, home loans and credit card loans. According to a recent sentiment survey from Marble Financial, 69% of respondents have said that they have an existing loan, with most respondents having at least one loan. Where many Canadians are excited to receive loan approval, most people dread the reveal on whether they’ll be paying a high-interest loan or not.

What Factors Affect How Much You Pay On Your Loan

When banks and lenders loan you money, they will always charge an interest rate. Alongside interest, there are many other factors that are considered when calculating the final cost of your loan. These generally depend on your lender or bank and how much you borrow. Let’s learn other factors that affect the final cost of your loan.

 Principal Amount

The Principal Amount is how much money you want to borrow. But you shouldn’t simply consider how much you’d like to borrow; more so how much you can afford. An easy way to decide this would be to assess your current budget to make sure you’re not borrowing beyond your means. If you haven’t established a budget yet, you can learn how here.

 Loan Term 

Your Loan Term is how long you’ll be paying back your loan. Your Loan Term will change how much your repayments are depending on how many months/years it takes you to pay your loan back in full. Generally, if you have a shorter loan, you may have lower Interest but higher repayment amounts. This is because you’re paying back your loan quicker in higher amounts. 

 Repayment Schedule

Depending on your loan, you may have the option to make repayments weekly, bi-weekly, semi-monthly or monthly. When making this choice, you should consider your budgeting style. As we mentioned, more repayments mean less Interest, because of the effects of compounding – so that weekly repayment may save you some money.

Repayment Amount

Your Repayment Amount is dependent on your Interest Rate and other fees you may have to pay, depending on your bank or lender. When making your repayments, not all of it will go towards paying off your loan. For example, the repayment amount will go towards your Interest first, and the rest will go towards your Principal Amount.

Interest Rate

No matter what kind of loan you take out – mortgage, car, credit card, or student loan – you’ll have to pay Interest back on top of the amount you borrowed. It’s a fee you pay to borrow someone else’s money, which is generally from your bank.

When you borrow money from a bank, the Interest is how they’ll profit from your loan. When you take out a loan and begin paying it back, your repayment is split into two parts; the part that reduces your balance to pay off the loan and the section that covers the interest cost. But how is your Interest calculated and decided by your bank?

How Is Your Interest Rate Decided On A Loan?

It isn’t the most straightforward task trying to figure out exactly how your interest rate is determined. Banks and other financial institutions in Canada will generally set the Interest using the prime rate guidance from the Bank of Canada. The prime rate (or prime lending rate), is the annual interest rate Canada’s primary or “prime” banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages.

If you’re borrowing off an alternative lender, your interest rate will not be in line with the prime rate. Generally, private (subprime) lenders decide interest rates using the potential customer’s current credit and financial information. These subprime lenders will determine your interest rate depending on your creditworthiness and risk factor as a borrower.

How To Avoid High-Interest Rates? 

Shop Around

It’s essential to shop around for any product you’re considering spending money on – and this is no different when it comes to choosing a loan. If you’re currently in an excellent financial situation, but still receiving a high-interest rate offer from your current financial institution, consider checking other providers and see what they offer. You may be surprised at the variety of rates you have to choose from.

Check out the difference between using a payday loan and a personal loan.

Boost Your Credit Score

When searching for a loan product, if you’re credit score is poor, you may receive a high-interest loan. This is due to your creditworthiness. If your credit score is considerably low, your lender will consider you a higher risk as a borrower.

If you’re looking to combat this, you can request a copy of your credit report from one of the two major Canadian credit reporting agencies, TransUnion or Equifax. You can then check your report to ensure there are no errors affecting your final score. You can request your credit report once a year without it causing any damage to your credit report.

To boost your credit score, sometimes merely knowing your credit score will not show you exactly how to improve it. You can always search for a credit-boosting platform and technology to help guide you in the right direction. There are many options online available for you to choose from with a variety of subscription options to suit you. For example, Score-Up is a proprietary credit boosting software, that harnesses years of credit data to help you quickly and efficiently boost your score. 

 Find A Reliable Co-Signer

In case you’re being offered a high-interest loan due to poor financial health, finding a financially responsible co-signer may help you fight your case. Finding a co-signer will work in the same way as offering collateral. If your potential co-signer is and continues to be reliable borrowed, this will help you lower your interest rate.

It’s crucial when asking someone to be a co-signer that they’re aware of the significant responsibility that it holds. In case you can’t afford to pay back your loan, they will be then responsible for finishing the payments for you. If you’re considering this route, check out these tips on how to ask a family member or friend to be a co-signer.

 Avoid High-Interest Lenders

If you’re in an unfortunate financial situation, choosing a low-interest loan may be difficult. Sometimes, your only option may be to turn to a subprime or high-interest lender. An example of such a lender would be payday loans. 

According to the Government of British Columbia, the most a Payday Loan lender can charge you in Interest is $15 for every $100 you borrow. This equals an annual interest rate of 391%, which is much higher than any other prime lender. It’s easier said than done to avoid high-cost lenders due to their enticing and quick loan approvals. But if you’re looking to combat a high-interest loan, it’s ideal to avoid these when you can.

Written by Grace Gearon from Marble Financial | Contributing Writer for Loans Canada 

Marble avatar on Loans Canada

Established in 2015, Marble is a financial technology company on a mission to help Canadians learn to better manage their personal finances and build better credit. Through socially responsible lending practices, like their Fast Track Loan and Score-Up credit building product, Marble has allowed thousands of consumer take back control of their finances. Moreover, Marble uses AI to provide recommendations and plans to help Canadians improve their financial health. They're also a BBB accredited business with an A+ rating.

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