Literacy Month Wrap up on Borrowing Money Wisely
This week we discuss how to borrow money wisely having knowledge of what the cost of the borrowing is and whether or not it is for a good reason.
By Shelley Koehli - Licensed Insolvency Trustee with D. Thode & Associates Inc. Vancouver
Last week we discussed S.M.A.R.T. Financial Goals. This is our final article for Financial Literacy Month
Borrowing Money Wisely
A mortgage is generally considered to be a good investment in borrowing as you are purchasing an assets that you expect to appreciate in value where a car loan is generally considered to not be a great investment in borrowing as the asset generally depreciates faster than the loan is paid off.
When you want to borrow, it is important to consider the following:
1. What type of borrowing would you need to do? Identify different sources and institutions that will possibly lend the money.
2. Compare the terms of the loans.
3. Calculate the cost of credit on each and compare.
It is important to remember that any hard enquiries on your credit bureau will impact negatively on your credit score. When shopping for a mortgage, using a mortgage broker can lessen the impact on your credit score as they can obtain your report once and shop the different institutions. Each financial institution will also have online calculators that you can explore for different types of lending.
Often lenders will offer you more funds than you need or have asked for.
Before agreeing to accept the higher amount, consider the following:
1. Is your income stable?
2. How will the payments impact my cash flow?
3. Do you know what your cash flow is? Make sure you’ve looked at your monthly income and fixed/variable expenses to ensure you have sufficient funds for your lifestyle before committing to a loan payment.
4. What are your financial goals? Has this figure been built into your monthly cash flow?
5. Have you considered emergency savings in your cash flow?
6. Will you be able to continue to save for your goals after taking on this new debt?
D. Thode & Associates Inc. can direct you to a reputable credit counsellor should you want to discuss borrowing. Cost of borrowing must be considered before taking on any new debt. Mortgages rates are set by the various lenders and are influenced by the bond market and by your credit worthiness. Credit Card interest is calculated by the prime rate plus the lenders margin rate. It’s a good idea to shop around for the best rate you can get and know about any other fees such as annual fees on the card.
Shelley Koehli is a Licensed Insolvency Trustee and Chartered Insolvency and Restructuring Professional with D. Thode & Associates Inc. in British Columbia.