Taking Out a Loan? Boons and Banes of Different Ways to Get Financing
COVID-19 has certainly created ripples in almost every aspect of our lives when it started in early March 2020. Perhaps one thing that it had a significant impact on but isn’t as thoroughly discussed is its effect on how Canadians spend their money.
According to a Statistics Canada article, there was a decline of 18.3 per cent in credit card debt between February 2020 (prior to the pandemic) and January 2021 (during the pandemic). This means Canadians applied more financial savviness to their budget. However, the fact that there weren’t many opportunities to spend money as the country was in a lockdown and under restrictions also helped Canadians to limit their expenses.
Now that things are gradually going back to normal, most Canadians are keen on getting their lives back on track. This could mean going back to school, opening a small business, or buying a car. If you’ve got your mind set on a big-ticket item purchase soon and have limited spending money, taking out a loan could be an ideal next step. Let’s look at the different ways to get financing.
When obtaining a loan from a bank, you would need a good credit score to get approved. If you’ve had problems in the past paying your credit card debt, the bank would most likely take that into consideration and it will affect your chances of getting a loan. You need to prove that you can pay your loans on time, and a high credit score is the best gauge for that. With a bank, you can specify exactly what type of loan you need, whether a student loan or an auto loan, and they can set up a payment plan that works best with your financial situation. Be wary though that if you don’t pay your dues on time, you’ll likely end up paying a high interest rate.
As the name suggests, payday loans are financing you can get that’s equivalent to what you’d normally receive in your paycheque. They are meant to be short-term loans but with high interest rates, and because of these, they are best used when dealing with an emergency and you don’t have any other option – but not when you’re aiming to buy a high-ticket item. An advantage of payday loans though is that it’s easy and quick to get approved for one because they won’t need to do a credit score check on you. Since it’s highly accessible, payday loans can easily make one fall into the debt trap because of the high interest rates that come with it, but lately, the government has launched efforts to clamp down on these to protect consumers.
This is another type of loan that’s easy to obtain but may have costly consequences, especially if the item you’ve pawned has great value to you not just financially speaking but also emotionally speaking. Getting money from a pawnshop means you have to part with a valuable item so you can get the cash you need. The loan typically amounts to about 25 per cent to 60 per cent of the value of the item. To get it back, you can pay in installments and unfortunately if you’re not able to do so then you may have to get ready to lose that item forever.
Loans from family or friends
You may have a family member or a friend who has available money to lend you, and as they are close to you, it’s more than likely they will say yes once you tell them of your need. And since they’re aware of your situation, it will be easy to work out a payment plan that truly works for you. However, as the adage goes, going into business with friends or family could lead to dire consequences, and it may ring true as well when it comes to borrowing money. If you’re unable to pay within the agreed timeline, then it may cause a strain on your relationship.
If you’re eyeing something that comes with a hefty price tag but don’t have the finances readily available, it’s not the end of the world. There are several ways where you can obtain the budget you’d need. However, be careful as they all come with their own set of advantages and disadvantages. Go through them thoroughly to work out the best one for you.
Pritchard, Justin. “How to Get a Bank Loan.” The Balance. https://www.thebalance.com/how-to-get-a-loan-315510
Statistics Canada. “Study: Trends in household non-mortgage loans: The evolution of Canadian household debt before and during COVID-19.” https://www150.statcan.gc.ca/n1/daily-quotidien/210823/dq210823c-eng.htm
VanSomeren, Lindsay, and Jordan Tarver. “16 Types of Loans to Help You Make Necessary Purchases.” Forbes. https://www.forbes.com/advisor/loans/types-of-loans/
Webber, Matt Ryan. “Payday Loan.” Investopedia. https://www.investopedia.com/terms/p/payday-loans.asp