4 questions to ask before getting a loan
Every day Canadians across the country borrow money, or “use credit.” Whether it’s paying with a credit card, financing a purchase, taking out an installment loan or opening a line of credit, borrowing has become part of our daily lives. In fact, borrowing has become so normal that it’s easy to overlook the importance of preparing yourself to take on new debt. That being said, it’s up to you as a consumer to be an informed borrower.
Here are 4 questions to ask yourself before getting a loan, to help ensure you understand your loan options:
1. How much can I afford?
Yes, you need money, but how much can you really afford to borrow? Before taking out a loan, find out how much your loan payments might be using a loan payment calculator like Fairstone’s (try our loan payment calculator), or check to see if your lender provides a loan payment estimator.
Next, look at your monthly budget to see if you have the money on hand to pay back your loan each month. You may need to rejig your budget to make it work, but remember to try not to cut back on savings to take on more debt.
Make sure to check your loan agreement to be sure you understand your options when it comes to paying your loan back."
2. How long do I have to pay off the loan?
The loan term, or length of time you have to pay back your loan, will likely depend on how much money you’re borrowing and the type of loan you choose. If you borrow a smaller amount, you’ll probably have to pay it back sooner — for example, at Fairstone, if you borrow under $2,000 your loan term can go up to 48 months, whereas if you borrow $15,000 your loan term can go up to 60 months. If you are considering securing your loan to get more money at a lower rate through a secured personal loan or mortgage product, you’ll likely have a longer loan term, with payments amortized over a number of years.
At Fairstone there are no prepayment penalties on unsecured personal loans, meaning you can pay back your personal loan as soon as you like without paying any fees. Depending on your lender, you may have to pay prepayment penalties on large loans or loans secured by an auto or real estate. Make sure to check your loan agreement to be sure you understand your options when it comes to paying your loan back: Can you pay your loan back at any time? Are there fees?
3. How much will a loan cost?
This question is tied closely with the last two. If you’ve used a loan payment calculator or cost of borrowing calculator, and chosen a loan term that feels right to you, you’ll notice your loan payments aren’t simply the total of money borrowed divided by loan term – you also have to pay interest on the loan.
While interest rate isn’t the only consideration when you’re getting a loan — payment affordability is probably the most essential — it’s still important to understand the impact of interest on the cost of borrowing. Ask your lender about how much money you’ll be paying in interest, and find out whether your loan payments are based on daily simple interest or compound interest, which impacts the cost of your loan.
4. Will my loan payments change over time?
Loan payments can be “fixed”, stay the same, or they may “fluctuate”, change, over time. If you choose a fixed-rate installment loan, like the loans Fairstone offers, your rate will stay the same throughout your loan term, meaning you’ll make the same predictable payments each time. A fixed-rate loan can be easier for budgeting, especially if you choose to automate or make scheduled future payments, because you’ll know exactly how much you owe each time.
With answers to these questions, you’ll be well on your way to understanding your loan options and finding the loan that suits you. Once you know how much you want to borrow and the type of loan you prefer, make sure you look for a lender that’s credible and provides a variety of loan options, so you can choose the one that suits you.
This article is for informational purposes only. For personalized financial advice, you should contact a qualified financial advisor.