Finance Fox

Every so often we run into a situation that we must rely on some form of credit. We’re not perfect, and life sometimes throws us unexpected curve-balls. Unexpected happens, the roof needs to be replaced, car needs to be repaired or a family emergency arises that make us go out and seek some much needed money to overcome the obstacle we’re faced with.

There are many different ways to borrow money. Some of the most popular sources for borrowing money are, lines of credit, credit cards, pay day loans, personal loans and overdrafts.

So, which type of borrowing method is the best? That depends on your unique situation.

Research should always be done before deciding to borrow money. It’s important to work out whether you’ll be able to repay the borrowed money, and how quickly you can pay the money back.

One should think very carefully about whether they really can afford to borrow more. The borrower should also bear in mind that paying back loans and credit cards may become a problem if they don’t make payments on time or if the interest rate goes up.

I’ll examine some of the more popular methods to borrow money. Some of these methods are best for long term borrowing, and others are best suited for short term borrowing.

Personal Loan

These types of loans are offered by banks or credit unions. Personal loans are intended for mostly short term borrowing. Generally short term is anywhere from one to three years. Interest rates are generally fixed and remain unchanged for the borrowing term.

Depending on the structure of the personal loan, the borrower may have the option to get a variable interest rate. Variable rates change with prime, so if the prime lending rate goes up, so does the interest rate on your loan.

Accessing a personal loan can be simple or complex, depending on the lending institution. If you’re looking to obtain a personal loan through your “home” banking or credit institution, the lender may be able to approve you via telephone. Whether the borrower is approved or not for the loan solely depends on their credit history, and amount of debt they carry or if any at all.

Personal loans can be used for virtually any purpose, yet most borrowers utilize personal loans for purchasing a new car or consolidating existing debt into a single lower monthly payment.

Line of Credit

Lines of credit are typically extended by banks, credit unions or other financial institutions to creditworthy consumers. Often a line of credit is called a personal line of credit. This same terms is also used to describe the credit limit of the borrower, which is essentially the maximum amount of credit one can have.

Lines of credit may be secured or unsecured. Secured lines of credit typically are attached to lower interest rates, while unsecured lines of credit come with higher interest rates. In either case, the interest rates are far more attractive, compared to the interest rates associated with credit cards.

Borrowers can secure their line of credit with some collateral. Typically home equity is used for securing a line of credit. In return the borrower will get a more attractive rate, while the lending institution gets the peace of mind that the money borrowed will be paid back one way or another.

Once the line of credit is in place, interest in only paid on the money borrowed. Line of credit borrowers should also be weary of fees on unused money, which is often an annual percentage charged once a year for the money not withdrawn.

Short Term Loan

Short term loans are often known as payday loans. Borrowers use payday loans when they run out money temporarily. Typically payday loans are short term (under a month). The money that can be borrowed is not in large sums, it typically varies from one lender to the next, but in most cases the borrowed amounts range from a few hundred dollars up to a thousand dollars. A pretty good website that offers short term loans and at reasonable rates is ShortTermLoans.ca . They are Canadian, so make sure you check them out.

Accessing  short term loans is pretty simple. You can apply for a short term loan now, and get approved instantly.  The borrower typically writes a check for the amount you are borrowing – plus a fee. The check is left with the lender, and the lender cashes the check as agreed, which is usually a few weeks after the money is borrowed. It’s that simple and easy.

If for some reasons the borrowed can’t repay the payday loan when it’s due, the borrowed amount can  be “rolled over”. Essentially this means that the loan is extended. Borrower doesn’t have to repay it, but fees keep accumulating.

One thing that pops out about short term loans is the interest rate associated with them. Borrower may pay a hefty interest rate for the short term loan. Despite a high interest rate, that is the cost of doing business, and convenience of getting a short term loan.

Borrowers are approved on the spot, and no previous credit history is necessary to get a payday loan.

Overdraft

An overdraft is an option attached to your existing bank account. Overdrafts enable the customer to continue to use the account in the normal way even though its funds have been exhausted. There are limits, and there is no such thing as an unlimited overdraft. The banking will set a limit on how much can be overdrawn.

I know that all of my accounts (business and personal) are attached to $1,000 overdrafts. Even though I never use the overdraft, it’s a good peace of mind. For example, no check in the amount of up to $1,000 can bounce, because overdraft protection exists.

Overdrafts are a convenient form of short-term temporary borrowing, with interest calculated on a daily basis, and its purpose is to assist the customer over a period in which expenditure exceeds income.

Overdrafts are an agreement in advance, between the consumer and the institution. Typically overdrafts  are an inexpensive way for of borrowing short term. Borrowers will pay a set interest rate, and typically a charge of $5.00 per overdraft. So, for example if the borrower withdraws $100 today, and $100 tomorrow, they will pay $10 fee in overdraft ($5/day) and the agreed interest rate (revolving) on the $200 until it’s paid back in full.

Credit Card

Credit cards are a source of revolving credit. The borrower has a credit limit and can use the credut card for purchases or other transactions up to the limited amount.

Credit card interest rates vary, yet most credit cards from banking institutions are associated with 19.99% interest rates. Store credit cards such as from The Brick or Leons, are associated with atrocious interest rates that typically vary from 24.99% – 29.99%.

The borrowers receive a monthly statement, detailing recent transactions and showing the outstanding balance. There is a grace period, typically up to 21 days to repay the borrowed amount at no interest charged.

If the borrower fails to pay the amount in full,  the remaining balance is carried forward. One thing to note is that the borrower is charged interest at the initial amount borrowed, and not on the decreasing balance.

Credit cards are an expensive way to borrow, with interest rates considerably higher than most other lending products. Additional charges exist to credit card holders,  if the card is used to withdraw cash (in store) or through an ATM.

Conclusion

People end up in trouble either due to their own foolishness or reasons beyond their control. Life deals us unexpected card, and we must obtain credit to survive. Borrowing money is unfortunately sometimes the only option left to get over the hurdle.

Some of the borrowing options above are better than others. Some are down right criminal, yet that’s what the cost of borrowing is sometime.

Whenever money is borrowed, the borrower should always work out how much money they actually need. Why take out a $5,000 personal loan, if you only need $2,000? Foolish strategy, that could lead to the road of debt.

Make a wise choice, shop around, and don’t be afraid to walk away.

Eddie