Written by: Rachel Surman, Borrowell
Canada, as a country, has a lot of household debt. In the last year, according to Equifax, household debt has actually skyrocketed to $1.8 trillion – and this number includes $90 billion of credit card debt! But did you know that not all debt is created equal?
In fact, a personal loan, line of credit or home equity line of credit (commonly referred to as a HELOC) can be a good idea because it can help you out in many situations or get you out of dire circumstance. So when is a personal loan a good idea? Here are four examples of when a personal loan could make sense:
When you need to consolidate high-interest credit card debt with a personal loan
The typical credit card has an interest rate of 19.99%. This doesn’t seem like a big deal, as long as you make your payments on time. But what happens when you miss one and get behind on your regular payments? You’ll get charged interest on your remaining balance and this can be a slippery slope.
Here’s an example. Let’s say you have $10,000 balance on a credit card with a standard interest rate of 19.99%. If you make payments of $250 each month (which is much more than the minimum payment), it would take you five years and seven months to pay off your debt. You’d also end up paying $6,547 in interest. That puts things into perspective, doesn’t it?
Compared to a low-interest personal loan that has an interest rate of 10.5%, you could be credit card-debt free in just three years and also pay only $1,734.93 in interest. You’d save about $4,812 by choosing a low-interest loan. As you can see, not all bad is bad debt. There are smarter ways to manage debt and faster ways to get out of it. If you own your home, HELOCs are another option to borrow funds at an even lower interest rate.
When you need to make an emergency purchase
I’m sure I don’t need to even need to say this, but sometimes, life doesn’t go as planned! Sometimes you just have to roll with it. For example, let’s say you’re seriously in need of a new car but you don’t have the money right now. Or, your landlord has decided to sell your apartment and you need first and last months’ rent for a new place ASAP. Or, your pet is sick and you need extra cash to ensure a speedy recovery.
This is when a personal loan can be very beneficial. It’s money that you can access when you simply don’t have the funds at the moment.
Remember: if you’re making a big purchase or are in an emergency situation, it’s important to think through the financing of your decision. In the heat of the moment, you may take a high-interest loan, but it’s important to shop around first to find the best rates.
When you need to finance your wedding
While this doesn’t necessarily fall under the emergency category, some events in life are just too big to pay for in full. Did you know the average wedding in Canada costs more than $30,000? Weddings are supposed to be the best day of your life, but those prices are definitely enough to cause some feet to get cold.
If you and your partner are paying for your wedding on your own (which is pretty standard these days), it might be tempting to put your purchases on your credit card. But borrowing against your credit card is not advisable if you recall what we covered concerning high-interest credit card debt and debt consolidation.
With the food, black tie attire, and entertainment, it’s easy for everything to add up. If you’re like most people and you don’t have a cool $30k lying around for your dream day, a wedding is a good time to take out a personal loan. With fixed payments and a set repayment schedule, wedding loans may be a much better option than getting yourself into costly credit card debt.
When you need to improve your credit score
A healthy credit profile should include a mix of credit types to demonstrate that you’re able to manage numerous credit commitments. Regardless of the type of credit account, the leading aspect impacting your credit score is your ability to make payments on time.
That said, not all credit is equal in the eyes of banks and lenders! For example, installment credit (term loans, auto loans, etc.) can often have a more favourable impact on your credit score than revolving credit. And while any type of credit can negatively impact your credit score if not managed properly, revolving credit comes with special considerations that borrowers should be aware of.
Your credit utilization (how much of your total available credit you use) makes up 30% of your credit score. Banks and lenders like to see your credit utilization under 30%. But if you’re overusing your line of credit or credit cards, this adds to your utilization ratio and can negatively affect your credit score.
The bottom line
As you can see, there are many times when a personal loan may be the best option for you. Having ‘smarter’ debt can be the better alternative in many situations and can even improve your credit score and financial well-being.
Borrowell helps Canadians make great decisions about credit. With our free credit score monitoring, personal loans and product recommendations, Borrowell provides the tools to help you improve your financial well-being and be the hero of your credit. Join the over 700,000 Canadians who have received their free credit score!
The views and opinions expressed on the Website are those of the contributor(s) and do not necessarily reflect those of Equitable Bank. Any information provided is for information purposes only and is not intended to constitute financial advice, or as an offer, endorsement or solicitation of a product or service by Equitable Bank.