Understanding personal loans
By ATB Financial 9 November 2018 4 min read
Secured and unsecured loans, lines of credit, interest, payment schedules—taking out a loan can feel complicated and expensive, but it doesn’t need to be! While none of us love the idea of being in debt, sometimes it’s necessary to help achieve our dreams or navigate life’s big hurdles.
You might be feeling overwhelmed by credit card balances, or maybe you’re planning on going to school, starting a home renovation or buying a car. We can help break down the scary world of personal lending so that you can live out your dreams without owing forever.
Isn’t a loan just a loan?
You borrow money, you pay interest on the amount you take, and you pay it all back. While it may sound simple, there are different types of loans to consider, depending on your assets, income, credit score and your comfort level. Working with a financial advisor will help you navigate the best loan.
Secured vs unsecured loans
The first question to answer is whether you’re looking for a secured or unsecured personal loan. A secured loan is tied to a tangible asset, such as the purchase of a new vehicle or trailer. This means that if you were to default on a payment, the bank can take possession of the asset and sell it to recover some of their costs.
Loans such as a home equity line of credit would also be considered a secured loan, because it’s tied to the market value of your home. Securing your loan to a tangible asset (which is called collateral) will sometimes let you borrow more money than an unsecured loan.
An unsecured loan can be used for things like specific purchases or for consolidating debt (such as paying off credit cards or combining a number of small loans). You don’t need to have a tangible asset, but your credit score will come into play in terms of how big of a loan you qualify for, and the interest rate you’ll pay.
If you have a number of small loans, or unpaid balances on a number of credit cards, a consolidation loan might be a good option. It will help you pay off your higher interest debts, and then you can pay down the loan on a payment schedule at a lower interest rate. Then you re-pay all that you owe with just one payment, whether that be on a weekly, bi-weekly or monthly basis.
What about payday loans?
Payday loans are a type of unsecured loan that works like a cash advance and is tied to the borrower’s paycheque. They are often for small, quick amounts that don’t require an application. While the convenience factor of “fast money” may feel tempting, this form of borrowing money is very expensive when compared to other personal loans—with fees upwards of $20 per $100 borrowed.
While a personal loan may require an application and approval process, you will save a lot more money in the long run thanks to lower lending rates.
How does my credit score affect my ability to get a loan?
Maintaining a good credit score is very important when you want to borrow money. Having good habits like paying off your credit card balances or trying not to always borrow to your maximum limit are just a couple of ways to enhance your credit score. Your credit score will affect whether or not you qualify for a personal loan, your interest rate and how much you can borrow.
What are some ways to pay it off?
Work with a personal banker to select a loan and create a payment schedule that’s comfortable for you. With an ATB Personal Line of Credit, you can pay it off within a predetermined schedule and pay it off earlier without penalty.
A Linked Line of Credit is an open line of credit which offers piece of mind, along with flexible payment options. You can pay it all off, chose to just pay the interest at any given time, and you only pay interest on the amount you use.
Final personal loan tips
Whether you need to borrow a lot or a little, keep the following in mind when you’re contemplating a personal loan:
Set your goals and make a plan to achieve them—How does your debt play into a broader personal financial plan?
Live and borrow wisely within your means.
Consider a protection plan—If something happens to you or your income, keeping up with loan payments may be a challenge.
Understand the different types of loans and choose one that works for you—Seek advice at any moment where you have questions or are unsure of something. At ATB, we pride ourselves on working with your best interests in mind, making sure you can live the life you want now, while planning for your future.
Learn more about credit scores in our Student Survival Guide.