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

Managing Debt

Six questions to ask before you borrow Add to ...

1. How much will you pay each month?

Take a look at your budget to make sure you can afford the monthly payment. 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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2. What is the total amount you’ll repay?

Find out how much the loan will cost when you add up all the interest you will pay, as well as all of the money you borrowed. The interest rate will depend on the type of loan. Some interest rates are fixed for the whole term of the loan. Others may go up and down as the Bank of Canada rate changes.

3. Is the loan secured?

The interest rate on a secured loan will often be lower than an unsecured loan. But if you don’t pay back the loan, the lender has a legal claim to whatever you use to secure the loan. That might be your home, your car or other property.

4. How long will it take to repay the loan?

This is the loan term. The longer the term of your loan, the more interest you will pay (if the interest rate stays the same). Find out if there is a penalty for paying the loan off early. Some lenders charge a fee if you make extra payments, or repay the whole loan early. Others offer more flexible options.

5. If you miss a payment, does the interest rate change?

With some loans, the interest rate might increase by 2% or more if you don’t make a payment by the due date.

6. Do you have to pay for any insurance?

Your lender might require you to insure your loan. This means the lender will make your monthly payments if you can’t for specific reasons, such as getting sick and being unable to work. If loan insurance is optional, find out how much extra it will cost and what it will cover. You may decide you don’t need the insurance.

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

 

Follow us on Twitter: @GlobeInvestor

 

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