How to Borrow The Money You Need For a Large Purchase
Buying a pair of jeans is certainly a lot more affordable than buying a sofa, a car, or even a house. Certain expenditures can be easily covered with whatever you have in your bank account. But others require a little assistance; namely, in the form of a loan.
Sometimes it’s helpful and even necessary to take out a loan in order to be able to purchase something very expensive. Whether you’re planning to furnish your whole house, purchase a car, or buy a house, a loan can certainly help.
Take a look at this infographic to know the cost of buying a house in Canada.
The question is, how do you borrow the money required to make a large purchase?
No Assets Are Created Equal
Before we continue with borrowing money, it’s important to understand the difference between “appreciating” versus “depreciating” assets. The former refers to assets that appreciate or increase in value over time, such as a house, while the latter refers to assets that depreciate or go down in value over time, like a car.
Obviously, appreciating assets are better. But there are times when buying an asset that depreciates over time is required. In times like these, sometimes a loan may be necessary.
Do you know what the true cost of borrowing is? Take a look at this infographic to learn.
Secured and Unsecured Loans
Loans are typically categorized as either secured or unsecured. A secured loan requires some type of valuable asset to collateralize the loan. In the case of a car loan, for instance, the collateral would be the car itself. If you ever default on your car loan, the vehicle could be repossessed by the lender.
Has your vehicle been repossessed? Here’s how you can get another car loan.
Unsecured loans refer to those which do not require any collateral and can, therefore, be riskier for lenders. That’s because if you ever default on the loan, the lender has nothing to recoup. That’s why they tend to charge higher interest rates in order to make up for the heightened risk.
Installment Loans, Revolving Credit, and Lines of Credit
The loan you take out can also be classified as either an installment loan or revolving credit.
Installment loans are any loans that require you to repay the entire loan amount in installments, such as a mortgage or auto loan. Almost all loans are installment loans if they require payment in this form, as opposed to payday loans which require full repayment in one lump sum.
Revolving credit allows you to borrow as much or as little against a specific credit limit that you are afforded. The required minimum payment may cover only the interest portion (which means your outstanding loan amount is not being paid down during this time) or can cover a little bit of principal in addition to interest.
What is revolving debt and how do you manage it? Find out here.
Obviously, the more you can contribute to the principal portion, the faster you can pay down your mortgage.
A line of credit can come in secured and unsecured forms. A popular form of a secured line of credit is a HELOC, or home equity line of credit, which involves borrowing money against the equity in your home to be used for other purposes. For instance, you might need to free up some cash to be used to pay for a home renovation project.
Read this to learn how to borrow using your home equity.
An example of an unsecured line of credit is a student line of credit, which is typically converted into a personal line of credit after graduation. These types of lines of credit generally have higher interest rates than secured types simply because the risk factor is higher for lenders.
Check out this infographic to learn all about how your credit score is calculated.
What Credentials Do You Need to Get Approved For a Loan?
Every lender has their own specific lending criteria, but they all have the same fundamental requirements. Generally speaking, lenders expect borrowers to have the following:
- Good credit
- Good income
- Low debt load
A borrower with good credit has a history of making debt payments on time, which reassures lenders that they are dealing with a borrower who is capable of making payments on time and in full every billing cycle. And with good income and a low debt load, the money needed to make the payments should be readily available.
Looking for a product that will help you manage your debt loan? Try reading this.
If you’re lacking in any one of these factors, you could find it difficult to get a loan. That said, you may have options, such as getting a co-signer, applying with an alternative lender, or taking time to improve your credit.
What Types of Purchase May Require a Loan?
There are several big-ticket items that typically require a loan to finance, including the following:
- College or university tuition
- Home renovation
- Sudden expense
- Medical expense not covered by insurance
The list is seemingly endless. Basically, anything that is over a few hundred dollars may require a loan. Whether you take out a mortgage, auto loan, student loan, personal loan, or debt consolidation loan, there is a loan product out there that can help you cover the costs associated with large expenses.
Take a look at these other loan types for credit users.
Are You in Need of a Loan?
If you’re looking to make a large purchase but don’t have the funds readily available to cover the cost, then a loan may be on your horizon. If that’s the case, let Loans Canada help you find the right loan product for you.