Despite what some might believe, borrowing money isn’t immediately an awful decision. According to recent statistics, more than 19 million Canadians take out a loan every year, which is why safe borrowing in Canada is so important.
When done right, it can be helpful and beneficial in the long run, as long as you employ safe borrowing strategies. So with this in mind, today’s blog explores financial tips you need to know to ensure you’re borrowing the right way.
Understanding Safe Borrowing
Although safe borrowing in Canada affects your financial well-being, it’s also essential for the overall stability of the Canadian economy. When you borrow responsibly, you’re helping the country maintain a reliable and healthy financial system that can withstand economic shocks.
You’re also ensuring you don’t fall into a debt trap with bad debt and produce more wealth in the long term with good debt. For example, taking out a loan for home renovations can increase the value of the home. Or taking out a merchant cash advance for business expenses through a company like Bizfund can help stabilize your operation.
On the other hand, incurring bad debt can trap you in a vicious cycle that can be difficult to get out of when the time comes. For example, borrowing for vacations, expensive dinners, and items that go down in value
Avoiding Common Pitfalls
Now you understand the value of good debt and why it’s essential to avoid making mistakes when borrowing money. With this in mind, you can learn about the common pitfalls you should avoid. Have a look below to learn about how you can take on responsible loans in Canada:
Don’t Borrow Unless You Need To
Many of us have goals of owning our own home, operating a successful business, or buying a car, and to achieve these goals, we often need to borrow money.
However, although lending money can be a good way to achieve these goals, it’s essential not to borrow unless absolutely necessary. Borrowing comes at a cost and can be financially significant.
So, think carefully before sending off a loan application and consider these two key points. They can help you determine if it’s the best move for you currently:
- Current Debt: If you already have debts for credit cards, car loans, or other items, it might be best to pay down this debt before taking on more.
- Rate of Interest: When a loan has a higher rate of interest, it can cost you a considerable amount to borrow the initial sum in the long term. That’s why it’s essential to calculate how much interest you’ll be paying over the loan’s term, so you know if it’s worth it.
Understand Interest Rates
When it comes to safe borrowing in Canada, it’s crucial to understand interest rates. For example, cheaper doesn’t always equal better because, in many instances, accepting a lower interest rate means sacrificing the ability to make extra payments.
It could also mean facing incremental charges later on. This usually happens if you ever need to change your loan terms or break it early, as with a mortgage. That’s why it’s best to read the fine print and ask the lender for full disclosure. This will let you see if the interest rate on the loan is fair and agreeable now and in the future.
Aim To Pay Back What You Owe Sooner Rather Than Later
No one wants to stay in debt longer than they need to, which is why it’s best to pay off debt sooner rather than later if you have the means to do so. This is especially true considering the sooner you pay off debt, the less you’ll spend on interest overall.
We recommend looking into even making small extra payments. For example, rounding up a monthly amount or adding a little extra from a tax refund to settle your debts. It might not seem like it, but paying even a little bit more than you should can make a huge difference.
Additionally, we recommend focusing on high-interest debts first. This includes personal loans and credit cards. And be sure to ask about any prepayment penalties. Unfortunately, with some loans, you can incur costs if you make a lump sum payment ahead of schedule. Keep this in mind as well when deciding which debt to pay off first.
Check Your Lender’s Reputation Before Borrowing
Not every lender is reputable. An increasing number of online lenders and fintech companies in Canada are participating in scams and predatory loans.
You can negate being the victim of this. Simply verify that your province licenses the lender you want to borrow from. It’s also best to read recent online reviews of them. This allows you to confirm they have a decent reputation before you sign on the dotted line.
Additionally, a way to ensure a lender is reputable is to verify that they are transparent in their operations. Verify that they are upfront about their rates, fees, and contact information.
Avoid Short-Term, High-Interest Loans Whenever Possible
It might be tempting, but try to avoid super short-term, high-interest loans whenever possible. Certain instant loans and payday loans can seem convenient. However, they often come with annual interest rates exceeding 400% once fees are factored in.
Unfortunately, these quick cash options often trap borrowers in a cycle of debt. So try to consider safer alternatives like merchant cash advances with lenders like Bizfund, low-interest personal loans, lines of credit, or credit union loans.
Choosing the Right Loan
Part of safe borrowing in Canada is choosing the right loan for your needs. So to help you make the right decision, we’ve shared a few tips below:
- Consider the Purpose: First, determine why you need the loan. For example, do you need a loan for debt consolidation, a home renovation, or business equipment? Once you know why you need a loan, you’ll know what types of loans to consider.
- Choose the Amount: Next, consider how much you need, and borrow only this amount. Once you know how much you need to borrow, you can narrow down your loan options further.
- Establish a Budget and Repayment: A key part of ensuring you only borrow what you need is establishing a budget and determining what you can afford to repay each month. Take a look at your income, expenses, and existing debt. Then decide the amount you can realistically afford to pay back.
- Check Your Credit Score: The interest rates and terms you’re offered are heavily influenced by your credit score. Before you borrow, check your current credit score to weed out ineligible offers and have leverage during negotiations.
- Shop Around: It’s essential not to accept the first offer you receive when borrowing money, as rates and terms can vary significantly. We recommend shopping around and looking at different lenders, including various online lenders, banks, and credit unions.
- Consider the Annual Percentage Rate (APR): The APR refers to the total amount you’ll end up paying on money you borrow. It’s incredibly important to consider the APR when borrowing money, as it helps you determine the feasibility of a loan.
- Choose Between Secured and Unsecured: You’ll also need to choose between an unsecured and a secured loan. The former requires collateral, like your house or car, but you are usually offered a lower interest rate. In contrast, the latter doesn’t require collateral and offers higher interest rates on loans.
Long-Term Financial Health
Safe borrowing in Canada is about managing your debt today and setting yourself up for a stable future. In Canada, interest rates and living costs are expected to continue rising and fluctuating in 2025.
So those who focus on steady savings, repayment discipline, and smart credit use are better positioned to weather financial ups and downs. Thus, those who bear this in mind are more likely to achieve long-term financial health, which is the overarching goal.
Key Takeaways
There is no denying that borrowing money can be an excellent way to achieve your many goals. But it’s vital to avoid common pitfalls and choose the right loan. We hope that the information we shared here helps you achieve both goals. If you are interested in borrowing money, we can assist you.
At Bizfund, we offer merchant cash advances to individuals across various industries seeking quick, safe, and favourable financing. If you’re interested in learning more, you can contact us here. Our team is eager to help you bring your dreams to life.
