Seven reasons to borrow money
1. Buy a home
Most people can’t pay cash for their home, so they get a mortgage. A mortgage can cost less than rent.
2. Buy a car
Some people pay cash for a car, but most of us borrow or lease. Always weigh the cost of borrowing against using your own savings.
Example: It may not make sense to hold onto a Guaranteed Investment Certificate (GIC) paying 3% interest, if you’ll pay 5% interest or more for a car loan.
3. Save for education
Almost half the students enrolled in Canadian universities and colleges borrow money to get there. Student loans are one of the cheapest forms of debt. They are also a good investment, because graduates tend to make more money than non-graduates.
Tip: Another way to finance part of your child’s education is through a Registered Education Savings Plan (RESP). It may be worth borrowing money to contribute to an RESP because each year you do, the government contributes too.
4. Save for retirement
You may want to borrow money to put into a Registered Retirement Savings Plan (RRSP). It reduces your taxes, and your savings can grow in value.
Tip: You’ll pay less interest if you pay back an RRSP loan within the year, perhaps using your tax refund. If you take longer, you may find one RRSP loan will start to pile up on top of another.
5. Start a business
The type of loan you need depends on how much you want to borrow, how you plan to use the money, how long you’ll need it, and how you’ll pay it back. Many new businesses go to a bank, trust company, or credit union for a loan. Other sources for financing include family and friends, equipment manufacturers, government agencies, and third-party leasing companies.
6. Handle an emergency
If the roof leaks, the pipes burst, or your car quits, you may have to borrow to pay those surprise bills. It’s better to save a bit each month for emergencies.
Tip: Look for the lowest interest rate possible. Never take a high-interest loan, or use your credit card for large amounts. Try to pay back the loan quickly.
7. Pay off debt at a lower interest rate
A consolidation loan is a loan at a low rate, which you use to pay off several older loans that have higher interest rates. Sometimes people put all of the debt they owe on their credit cards into one. Others pay off their loans and credit cards by increasing their mortgage, which may have a low interest rate.
Remember: There are times when borrowing makes sense.
Make sure you understand the cost before you sign any loan papers, and make sure you can afford the extra debt. It’s important to shop around for the best interest rate you can get and not to borrow more than you need, just because you can.
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