Guide to borrowing: Let's unpack how to borrow money
Thinking of taking out a loan? Consider learning about the options available to you, as you decide whether (and how much) to borrow. This guide is a great place to start.
Thinking of taking out a loan? Consider learning about the options available to you, as you decide whether (and how much) to borrow. This guide is a great place to start.
No matter how hard you work, budget, and save, there are times in life when you need a little extra cash. As money can be hard to come by, the best option in such situations can sometimes be to take out a loan.
Any time you change your financial status—in this case by taking on debt—it’s important to understand the implications of your choices. Your credit union is here to help walk you through them.
Borrowing isn’t about getting money for free; it’s about entering into a contract with your financial institution so they can provide you with a service. While that can come at a price, it can also make a lot of financial sense.
It’s just a matter of knowing the facts when it comes to borrowing money.
First things first: what exactly does it mean to borrow money?
When you borrow money from a financial institution, you’re entering into an agreement where your financial institution agrees to provide you with a set amount of money and you agree to pay it back based on a pre-determined set of criteria, better known as terms.
The terms of your loan dictate how much money you can borrow and how you will pay it back, including how long you have to pay back what you owe, how much your monthly payments are, and what interest rate you will be charged.
There’s a lot of lingo associated with borrowing money. If any of the terms you come across in this guide throw you off or confuse you, don’t worry. We’ve captured them all in our financial terms glossary.
Borrowing includes everything from credit cards to mortgages. You can take out a loan to buy a new car, fund your education (a student loan or line of credit, for example), and so much more.
The short answer: Anybody over the age of 19 in Nova Scotia, New Brunswick, and Newfoundland and Labrador, or 18 in Prince Edward Island. And when you borrow or bank with a credit union, those funds stay within your community.
The longer answer: Financial institutions will consider your entire financial picture when you apply for a loan of any size or type. Factors include your income, employment status, credit history, personal situation and more.
When thinking about borrowing, consider what you’re borrowing money for. Is it to pay for school or a vehicle? For this season’s hottest concert tickets? While the reasons you want extra cash can feel valid, consider whether you need to take on that increased debt.
Conversely, borrowing can be a great solution for tackling debt. It may seem counterintuitive, but a loan with a lower interest rate than a credit card can clean up existing debt or help restructure payments.
The biggest factor in weighing whether a loan is right for you is whether you can afford it: does your budget have room for an extra payment. Our personal loan calculator can help you picture that more clearly, and our experts are here to help you figure out the rest.
Let’s dive in and start building an understanding of the kinds of personal loans that exist, their features, and which might be the best fit for you.
There are many different types of loans—below are some of the main types of personal loans as well as lines of credit.
Typically, personal loans are used to finance fixed-cost items like a vehicle, a piece of equipment, or a piece of property. Personal loans tend to be one offs: an agreed upon amount of money is paid back on an agreed upon timeline at an agreed upon interest rate.
Once those terms have been met, the loan is considered complete.
A business (or commercial) loan is money loaned to a business by a financial institution based on business factors, like time in business, current finances and an overall business plan.
There are three main types of commercial lending offered at most financial institutions: a demand loan, a conventional mortgage (which can be applied to business properties), and a line of credit. To learn more about each, check out our business planning guide.
A home equity loan is a type of loan where you use the equity of your home as collateral. The loan amount is determined by the value of your property, which is determined by an appraiser from the lending institution.
A fixed-rate loan has the same interest rate for the entirety of the borrowing period, while variable-rate loans have an interest rate that changes over time.
A line of credit, by comparison, is more about having access to a set amount of funds when or if you need them. You could leverage a line of credit to pay for school, a wedding, or an unexpected expense, but you probably wouldn’t use a line of credit to pay for something like a car.
As you pay down your line of credit, you regain access to more funds, so you don’t have to close it down once you’ve paid it back. For instance, if you have a $5,000 line of credit that you pay back down to $0, you once again have access to the full $5,000. By that same logic, if you’ve only borrowed $2,500 on your $5,000 line of credit, you still have access to $2,500.
Every loan comes with an interest rate. It’s essentially the fee that the financial institution is charging you for letting you borrow money. How high (or low) that interest rate is depends on a variety of factors.
The Bank of Canada determines what the prime—or baseline—interest rate is based on a variety of factors like inflation, strength of the dollar, and the overall economic outlook. The rate is fixed, but eight times per year, the Bank of Canada has scheduled announcements where they can opt to adjust the interest rate or keep it as is.
From there, the interest rate can vary by financial institution. Typically, interest rates are determined based on the prime rate, plus a premium that compensates for the risk that is involved in lending money. The higher the risk associated with the loan, the higher the interest rate tends to be.
You’ve done your homework and you’re ready to take the next step toward borrowing money to fund your project or situation. Here’s how it all goes down.
The first step to borrowing is connecting with your financial institution. When you meet with an expert, whether in person or online, come prepared to talk about what loan option might be right for you, how a loan can fit into your budget, and any questions you may have about the formal application process.
There are no set criteria for how much money you are eligible to borrow. It depends entirely on your unique situation and what the money is going to be used for.
The best way to ensure you get what you need is to go into the process with a number in mind. If you know you need a certain amount of money to pay for tuition and books, for example, ask for it. Having a clear number in mind can help set expectations in the negotiation process.
There are a variety of different factors that are considered in your loan application. Things like your net worth (including what assets and other debts you may be carrying), your employment status and income, and your credit history.
But the most important factor to consider is whether you can afford to take on more debt. If the answer is no, your application might not be successful. And if you find yourself in that situation, your credit union will work with you to evaluate areas you can work on and provide advice so the next time you apply, you’ll have a better chance of being successful.
Typically, a co-signer is useful or sometimes necessary when a loan application is not as strong as it could be. This could be for a variety of reasons: the amount you’re asking for might be too high, you don’t have enough assets to support the ask, or your income might be too low.
Most student lines of credit require a co-signer. Regardless of the reason, a co-signer can add strength to a loan application. It’s recommended that a co-signer be a family member or somebody else you have a close and trusting relationship with. A co-signer is putting their financial reputation on the line, so having a good level of trust is incredibly important.
Once you’ve been approved for a loan, you’ll receive something known as a lending package. This is an important set of documents that contain details like the terms of your loan, how long you have to pay it back, the monthly amount due, and the interest rate.
It’s important to keep these documents in a safe place. They act as the contract between you, the borrower, and your financial institution, the lender. This package will also contain information about your loan insurance, which we’ll walk through here next.
For credit unions, their members’ wellbeing always comes above profits. If you ever feel concerned about your loan, or about any other financial product you have, credit union experts are happy to connect and help.
Taking out a loan of any size is a big financial responsibility. And just as you purchase car or house insurance with the hope that you’ll never need to use it, you can also take out loan insurance if you want that added protection.
Most loans have life, disability, and critical illness insurance available as an option. That way, if something happens and you’re not able to meet the terms of your loan, you’re covered in those situations. Remember to consider this option and decide whether loan insurance is the right decision for you.
Having a budget is always important, but it’s especially important when you’re considering taking on new debt in the form of a loan. Before you sign any papers, you should know that you can financially afford to take out that loan.
But, because life happens, there may be a situation—like, say, a global pandemic—where your financial circumstances change quickly and you’re not able to make your payment. If this happens, call your financial institution and explain the situation.
Credit unions, in particular, will try to figure out a solution that works for everyone. This could mean a reduction in payment, a slight delay in when your payment is due, or in more severe cases, a deferral in your payments. Their experts are great listeners who are there to help you to figure things out.
There is always a solution—but ignoring the situation is not the answer. Not meeting the terms of your loan can result in late payment charges. It can also negatively impact your credit score if your payment remains overdue. The specific implications of a late or missed payment will be outlined in your lending package.
Maybe you get a raise or a bonus at work, or maybe you find yourself with some extra money. If that’s the case, paying off your debt as quickly as possible is typically a good idea, as long as your loan doesn’t penalize you for doing so.
Have a look at the terms of your loan agreement to see whether this is the case for you and your situation. Some loans (like mortgages) carry a penalty for paying them off early, whereas more flexible loans like a line of credit typically don’t carry penalties for early payment.
Taking out a loan can be a great way to make a large purchase, provide coverage for those times when life happens, or to invest in yourself. But it’s also a big decision.
Borrowing money is the easy part. Paying it back is what takes effort and consideration. Credit unions like to get to know their members and their unique needs and situations. By working with a credit union, you can expect that human touch and the refreshingly honest financial advice that you need to make good financial decisions.
Credit union experts are here to support your financial journey, whether you're just starting out or well on your way. Take the first step today.
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