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Debt (Photos.com)
Debt (Photos.com)

Managing Debt

Five quick tips to reduce your borrowing costs Add to ...

1. Borrow only when you need to

In some cases, borrowing makes sense. But there’s always a cost: the interest you pay. In general, borrow only when you need to – and to pay for things that have lasting value or the potential to go up in value.

2. Borrow only as much as you need to

Look at your gross debt service ratio (GDSR). This is the percentage of your gross monthly income that you need to pay your basic housing costs. If your GDSR is higher than 32%, you may find it difficult to cover other expenses.

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Also take a look at your total debt service ratio (TDSR). This is the percentage of your gross monthly income that you use for housing and other outstanding loans and debts. Most financial institutions won’t grant you a loan if your TDSR is above 40%.

3. Shop around for the lowest interest rate

If you’re making a major purchase, like a house, a fraction of a per cent can save you thousands of dollars. Make sure you know the right questions to ask before you borrow.

4. Plan ahead

It’s often easier to negotiate a lower interest rate when you have time on your side. It may also be easier to get approved for certain types of loans, like lines of credit, before you may need them. Another idea is to get a pre-approved mortgage if you know you’re going to buy a house.

5. Pay down your debt quickly

The faster you pay off the principal, the less interest you’ll pay. For example, paying down your mortgage biweekly rather than monthly can save you a large amount of interest. On the other hand, if you miss a payment, your interest rate could go up and you could damage your credit rating.

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca


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