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Most people will need to borrow money at one time or another, even if they have a steady income. Unexpected medical, moving, or emergency expenses, for example, can all require you to come up with money that you don’t have. There will be times when you won’t be able to say no to a loan, even if it costs you a high-interest rate or collateral. However, you have some flexibility in the type of loan you choose. No matter your situation, there are certain loans that you should steer clear of as much as possible.
All loans will cost you something, whether it’s interest, fees, or other specific factors based on your contract. Here are a few things to consider when evaluating a loan:
Depending on the lender and your financial situation, interest rates can be reasonable or astronomical. Interest is more than just a certain percentage of the money borrowed each month – to evaluate it properly, it’s important to calculate how much interest you’ll be paying over the course of your loan’s term. Additionally, you’ll want to assess your APR, or annual percentage rate, which is often higher than the interest rate. APRs include other fees determined by your lenders, like broker and closing fees.
Many lenders and brokers have high annual fees, and they are not always obvious when you first look at an agreement. Calculate the impact of a loan’s fees into your monthly payments to assess whether or not it’s worth it.
A common fee added by lenders is the loan origination fee. Find out how much loan origination fees can add to your cost.
The shorter the term, the less time you have to pay back your loan. When deciding on a loan, make sure you assess your monthly costs if the term is short. The last thing you want is to take out another loan to cover the cost of the first if your repayment period is too short. This traps you in a debt loan cycle, so it’s worth giving yourself extra space in your loan term.
Many lenders will try to minimize their risk in lending to you, especially if you have poor credit. One way lenders minimize risk is by requiring collateral on their loan. Make sure you’re confident in your ability to make your loan payments before agreeing to a loan contract that requires collateral. You risk losing your collateral, like your home or car, if you cannot repay the loan.
Check out the drawbacks of getting a cosigner for a loan.
When shopping for loans, there are many options giving you the ability to compare multiple lenders and agreements. You won’t always be able to escape a high-interest rate or short repayment term, but you’ll want to avoid these kinds of loans at all costs:
Learn more about which loans to avoid in Canada.
Payday loans are a common form of financing for many credit constrained Canadians who need quick access to cash. The name itself sounds harmless – a quick, short-term loan to help you make ends meet until payday. Often described as predatory, payday loans will charge the absolute highest interest rate legal in the province the lender operates in. For example, an ad for a $300 payday loan will often be marketed as a low price of $63. However, if you do the math, that’s a whopping APR of almost 500%. The convenience and clever marketing often hide the true cost of a payday loan, making them appear less predatory than they are. Avoid these at all costs.
A cash advance is taking out cash from an ATM using your credit card. Taking out a cash advance results in high-interest rates implemented immediately, which only subside once you pay off the rest of the balance. The cash advance feed and consequent ATM bank fee also get tacked on to your overall cost.
Auto title loans are loans that require you to put up your car as collateral. With interest rates at almost 25% per month, auto title loans are one of the most expensive forms of credit. They are also short-term loans, and often have hidden fees. The worst part is that you must give up your car in the event that you cannot make your loan repayments
There are a number of alternative lenders in Canada who offer more affordable rates and terms than payday lenders. While you may not receive the funds the same day, you can usually find lenders who can fund you within 2-3 days. Moreover, these lenders base their approval on more than just your credit score, making it ideal for those with bad credit. Typically, income, debt-to-income ratio and employment stability are used to assess eligibility for the loan.
If you have poor credit or a blank slate of credit history, there might be times when you’ll feel desperate enough to explore a payday loan, cash advance or auto title loan as a quick fix for cash. However, you shouldn’t use these loans if you can help it, as the costs and risks are higher than any other loan. You should only use them as a last resort and rely on any other option, even borrowing from family or friends, before considering these loans.
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