Have you had to take out a personal loan or open a line of credit to deal with an expense that your cash levels couldn’t cover?
Life can throw a lot at you and sometimes a small loan can come in handy. But debt from personal loans and lines of credit can add up and put a strain on your household finances. And they often come with other types of debt, like credit cards, car loans, mortgages, payday loans, and so on.
Is the answer to add more debt? A common reaction to dealing with unmanageable debt is to consolidate by taking out another loan. But before you decide on any course of action, it’s a good idea to know the pros and cons of different types of borrowing and understand all your options.
A personal loan is often used to make a large, one-time purchase. Issued by your bank or another financial institution, the interest rates are usually much lower than a credit card and can be used for a wide range of expenses.
Here are some key characteristics of a personal loan:
| Pros | Cons |
|---|---|
| Loan amount is fixed | You can't borrow more if your budget changes |
| Monthly payments are fixed; balance decreases each month | Higher monthly payments vs line of credit or credit card |
| Typically, you can pay if off early without penalty | When used to consolidate debts, the loan doesn't address the cause of debt |
Similar to credit cards, lines of credit are a revolving type of credit that allow you to borrow funds as you need them at a much lower interest rate.
Here are some key characteristics of a line of credit:
| Pros | Cons |
|---|---|
| Borrow what you need, when you need it | Interest rates and monthly payment fluctuate |
| Lower monthly payments vs personal loan | Requires self-discipline to avoid overborrowing |
| Funds are available for emergencies | Minimum payments pay off interest, not principal |
When you’re low on money and aren’t able to make ends meet, alternative lenders may seem like a good idea. But here are some steps to take before incurring a payday loan or an installment loan.
Can you delay the big expense and take some time to save? Can you eliminate certain expenses that will help you save more? Tracking your monthly expenditures, cutting down on non-essential spending and downsizing your expenses can often go a long way to avoiding debt. Try our budget planner here.
How are you handling your current debt payments? A good way to assess your finances is to calculate your debt-to-income ratio. Use our calculator here. You can also speak with a Licensed Insolvency Trustee (LIT) who can provide a free assessment of your overall financial health.
Are your debt levels too high? An LIT can explain all your debt relief options. Filing a consumer proposal, for example, can substantially reduce your unsecured debts, freeze interest charges and substantially lower your monthly payments.
Are you able to save and budget for that expense before taking out a loan? Find inspiration by listening to this podcast about the virtues of establishing a budget.
Learn more
Learn how a consumer proposal helped these new parents reduce their debt burden, which included multiple lines of credit.
Learn morePersonal loans and lines of credit can result in high debt loads. Our debt professionals provide sound advice on a path forward so you don’t have to face your debt alone.
A BDO Licensed Insolvency Trustee is always available to discuss your debt relief options free of charge and without any obligation on your behalf.
