Savvy shoppers know not to spread their credit cards too thin. After all, a bad credit score is something that will haunt you for a long time to come. If you’re considering a large purchase, it’s often best to avoid using your credit card. A personal loan is often a better alternative.
By taking out a personal loan, you can make better use of your credit score when you borrow anywhere from a few to several thousand dollars on a personal line of credit—which also allows for variable repayment terms to provide more flexibility in how you pay it back.
So what are the most common reasons for Vancouverites to take out personal loans? Let’s examine the top reasons and talk about why they make good financial sense.
1. Renovating your home
Renovating your home is probably the wisest investment you will make. Why? Because home renovations yield the biggest return. So while you might be borrowing $20,000 to redo that dated kitchen, remember that you’ll reap the benefits when you resell your house or condo.
Just beware that not all renovations are worth the investment. Kitchens, bathrooms and hardwood floors are the best use of your money as are any structural changes that will help save on energy bills like new windows, roofing, or energy efficient heaters. Do your research before taking out your cheque book.
2. Investing in your RRSP (Registered Retirement Savings Plan)
Come tax season (March/April each year), Canadians are scrambling to top up their RRSP contributions. By taking out a personal loan, you’re able to take advantage of an RRSP to lower your taxable income for the previous year as well as build your nest egg for retirement.
3. Purchasing a new or used car
Vancouverites are fortunate to have a decent public transit system. However (and this is a big however) public transit isn’t always good enough. Most of us still need a car for work, for family and for fun, but sometimes getting a car, whether through dealer financing or leasing, isn’t feasible.
A smart alternative is to get a personal loan. While a car dealership’s interest rates may be too high, personal loans are often available at prime plus half-a-per cent (depending on when you’re reading this article), which means you’ll pay the car off sooner and that extra money you would have spent will be going into your own account instead of the dealership’s pocket.
4. Consolidating debt
If you have debt in many different places, i.e. several credit cards, car payments, mortgage, etc., you might want to take out a personal loan from a financial institution in order to repay all your debt. This way, you’ll only have to make one single payment, your personal loan. This is called loan consolidation and it makes sense for most people who are in this situation.
A Few Things to Keep in Mind
Lastly, remember that it’s important to always pay attention to the fine print. Some personal loans will penalize you if you repay the loan too soon. Consider secured versus unsecured loans as well as the interest rate associated with the loan.
Talk to your financial advisor to see what’s right for you before making any costly decisions. And always take out personal loans from trusted financial institutions. Once you’re confident you’ve found the right institution to lend you the money and the terms are agreeable to you, then you can actually start planning ahead.