President's Choice Financial|helpful stuff|financial wellness|borrowing & credit

choosing the best way to borrow

That leather jacket you've had your eye on just went on sale, but you don't have enough cash in your wallet to buy it. What can you do?
You've found the perfect used car, but you don't have enough money in your savings account for the full amount. What can you do?
You want the flexibility to buy some investments without selling others. What can you do?

Borrowing is one option. "Credit", "debt", "loan" — they're all different words for the same thing. In each case, you borrow money from somebody and promise to pay it back, usually with interest. Whether it's a credit card, a loan, or a personal line of credit, responsible borrowing can be a great tool to help you reach your goals. Managed poorly, though, borrowing can be an awful headache. Every time you fail to repay, you can harm your credit rating — which can make it harder for you to borrow in the future — and the costs associated with borrowing will grow. The first step towards responsible borrowing is understanding your options.

Essentially, every debt has three parts:

The amount you borrow. This depends on what you need the money for. It might sound obvious, but the most basic rule of borrowing is this: The more you borrow, the more you have to pay back. If it's not absolutely clear to you that you'll be able to repay your principal, with interest and on time, then you probably want to hold off on borrowing.
The interest rate. Different interest rates apply to different types of credit. For instance, with a fixed rate loan, the interest rate will stay the same over the term of the loan. With a variable rate loan, the rate you pay will fluctuate with the market. Some types of loans give you the choice of fixed or variable interest rates. If you think interest rates are rising, you might want to lock in today's lower rate with a fixed rate. If they're falling, you might prefer variable rate debt. It's important to make sure you're comparing apples to apples when considering interest rates — by, for instance, looking at the Annual Percentage Rate (APR) that applies to each borrowing option.
Repayment terms. These define how the amount you borrowed has to be repaid.

Once you understand how debt works, you can decide the best way to borrow. For instance, with a personal loan, you'll borrow a set amount and pay it back according to a fixed schedule. Some loans require collateral, which is property or assets that you promise to give the lender if you can't repay the loan. Many borrowers use personal loans to pay for big purchases.

A personal line of credit lets you borrow any amount up to a certain limit, and you only pay interest on what you borrow. A personal line of credit might make sense if you're not exactly sure how much you need to borrow, and you'd like the flexibility to decide how and when to repay your debt.

With a credit card, you have the ongoing ability to borrow for day-to-day personal and household expenses. It's important to try not to charge too much to high interest rate cards, and to keep your balances under control. You might even consider transferring your credit card balance to a card offering a lower rate. Learn more about making the best use of credit cards.

choosing the best way to borrow

Essentially, every debt has three parts:

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