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Tag: recovering from debt

  • Personal loan versus line of credit: Which should you choose? – MoneySense

    Personal loan versus line of credit: Which should you choose? – MoneySense

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    Personal loans vs. lines of credit

    With a personal loan, you borrow a single (fixed) amount of money from a bank or other lender. In return, you agree to pay back the principal plus interest over a certain period of time. This is called “installment credit.” Often, personal loans are for specific expenses. For example, you might apply for a car loan to buy a vehicle, or a debt consolidation loan to reduce your debt. Personal loans can be secured with collateral or unsecured, and the amount you’re eligible to receive is tied to your credit history and financial picture.

    When you’re approved for a line of credit, the bank, firm or lender extends a certain amount and you can borrow on an as-needed basis. Whatever you pay back, you can access the credit again, just like with a credit card. This is called “revolving credit.” You can use the money for any purpose you wish. Just like with loans, lines of credit can be secured or unsecured. 

    Here are the key differences at-a-glance.

    Personal loan Line of credit
    Type of credit Installment (non-revolving) Revolving
    Payment schedule A fixed amount over a fixed time period. As-needed, with a minimum monthly payment if you borrow
    Interest rates Fixed or variable Usually variable, and tied to the Prime Rate (which is currently 6.45%.)
    Interest applicability On the whole loan Only on what you borrow
    Extra fees Transaction or service fees Transaction or service fees
    Uses A need specified when applying Any purpose, no need to reveal

    Pros and cons of a personal loan

    Here are the pros and cons for personal loans.

    Pros

    • Interest rates can be lower than with credit cards
    • The fixed payment schedule ensures your loan will be repaid by a certain date.

    Cons

    • Typically higher interest rates than the majority of lines of credit.
    • To use more credit you have to refinance the loan or get a separate loan.
    • Lenders may charge fees for administering the loan.
    • There might be limitations on what you can spend the money on. A car loan is only for the purchase of a vehicle, which may seem obvious, but other loans may only be used for renovations or debt consolidation. 

    Pros and cons of a line of credit 

    Here are the pros and cons for lines of credit.

    Pros

    • Typically have lower interest rates than personal loans.
    • Interest is only charged on the portion of credit used.
    • There is no fixed term so you can pay it off at any time without penalty (as long as you pay the minimum monthly amount).
    • The credit is “revolving”, meaning that once you pay it back you can borrow again without refinancing.
    • You can use the money for any purpose.

    Cons

    • Interest rates are variable, based on the prime rate, so the loan rate will fluctuate. For example, you might have a line of credit where the interest rate is prime + 1.5%. As the prime rate changes, so will the total interest on your line of credit.
    • Lenders often offer the maximum amount which can make it easy to overborrow. 
    • As there is no fixed payment schedule, you must manage repayment on your own. 
    • A secured line of credit against your home (like a HELOC) will require a one-time appraisal as well as legal fees. 

    How interest rates work for loans and lines of credit

    The interest you pay on a personal loan or a line of credit will depend on many factors including the lender, your credit history, the terms of the credit and the prime rate (in the case of variable interest). That said, these are the variables you can negotiate to get the best rates. 

    For a personal loan:

    • Interest rate
      Look for the lowest rate available to you, and decide whether you prefer a fixed or variable rate. 
    • Fixed or variable rate
      Loans most often incur a fixed rate, meaning that the interest is the same throughout the term of the loan. With a variable-rate loan, the interest rate will change in the same direction as the prime rate. 
    • Secured or unsecured
      You might negotiate a lower interest rate if you can secure the loan with collateral, such as a home. 
    • Amortization period
      Amortization is the amount of time you take to pay off the loan and can range from six months to 60 months (five years) for personal loans, reports the Financial Consumer Agency of Canada. Adjusting your amortization period might affect your interest rate.
    • Fees or penalties
      Loans come with fees. With personal loans, for example, you may pay a penalty if you pay it off early.

    For lines of credit:

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    Keph Senett

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  • What happens if I don’t pay my credit card bills?  – MoneySense

    What happens if I don’t pay my credit card bills?  – MoneySense

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    If you’re struggling to make your minimum credit card payments, you’re not alone. Unexpected emergencies can sometimes leave us short on funds to make the minimum payment on a credit card. According to Equifax Canada’s 2023 Market Pulse Consumer Credit Trends and Insights report, nearly 35% of Canadians carry balances on their credit cards from month to month. However, there are potential consequences for not paying your credit card bill on time. So here are the steps you can take to minimize the impact.

    Note that credit card companies may respond differently to missed payments, ranging from a tersely worded letter to potential legal action, depending on your issuer and your situation. In this article, we’ll explore the implications and ways to manage your credit card debt.

    What are the immediate consequences of not paying a credit card bill?

    If you don’t pay your minimum credit card balance, there could be different outcomes depending on the type of credit card you carry and the credit card issuer. Missing a couple payments will usually result in a hit to your credit score, as well as penalty fees like late charges and potentially a higher interest rate. If you miss more than one payment, the credit card company may also close your card. 

    Review your credit card agreement to ensure you are aware of your obligations and any potential penalties. If you miss payments, the credit card company may do any or all three of the following, according to the Canadian government:

    1. Revoke promotional interest rates.
    2. Increase interest rates in general.
    3. Cancel the credit card.

    Will my credit score be impacted if I don’t pay?

    Payment history is the biggest factor in calculating your credit score, so a late or missed payment can definitely impact it. Your credit score indicates creditworthiness for lenders, meaning it influences the loans you may qualify for, the interest rate you’ll pay, what you can buy on credit, and maybe even where you work and where you live. 

    Typically, one missed payment won’t end up on your credit report for at least 30 days after the payment due date. If you make the payment before that point, you might incur penalty fees, but your credit score likely won’t suffer. However, if you don’t pay your credit card for longer than that, your credit will take a hit and hinder your ability to qualify for certain financial services in the future.

    Interest increases and penalty fees on missed card payments

    Depending on the terms and conditions of your credit card, you may have to pay a late fee if you miss a payment. Penalty fees can depend on your balance and what’s outlined in the credit card agreement. 

    In addition, you might face a penalty annual percentage rate (APR) if you miss payments by at least 60 days, resulting in a higher interest rate being applied for a period of time. And that can grow your debt even higher. These terms differ depending on the credit card issuer. 

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    Randolph Taylor

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  • The risks of credit repair companies in Canada – MoneySense

    The risks of credit repair companies in Canada – MoneySense

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    Some companies claim they can repair your credit and solve your debt problems quickly. However, you can only rebuild credit and there’s no quick fix to do so. We’ll walk you through why you should be skeptical of companies offering credit repair services and explore other ways to rebuild and maintain strong credit. 

    The importance of strong credit in Canada

    It’s important to have a good credit score so you can get a loan, be approved for a credit card, buy a home and a car. And you want to get the best interest rates when doing so. A credit score may also determine whether a landlord approves your rental application, and employers might even consider credit histories in their hiring process. Having a strong credit score shows you are good at managing debt and credit. In contrast, bad credit suggests you are a risky bet to lenders because you may be having problems with money. 

    Why someone might reach out to a credit repair service

    The average Canadian owes more than $21,000 in consumer debt. When you have a lot of debt and other monthly bills to take care of, it can become difficult to manage and make all of your payments on time, especially amid high inflation and rising costs of living. However, if you don’t manage your payments on time, your credit score will take a hit. Feeling desperate in a financial situation can cause anyone to make a bad decision. But many people run into further financial problems by trying to repair their credit with a quick fix.

    How credit repair companies work

    Credit repair companies say they will repair your credit by removing negative information from your credit report, thus boosting your credit score—for a costly, upfront fee. They may also offer to negotiate with credit reporting agencies to improve your credit score or encourage you to take out a high-interest loan to pay off your debts. Be aware that these credit repair companies make money from fees, set-up costs and interest, so you may be left with even more debt without any changes to your credit score.

    These companies often take advantage of the fact that many Canadians don’t know you can’t remove accurate information from your credit report—even if it’s bad. You should be skeptical if a company says they can remove accurate, negative information from your history.

    Pay attention to the warning signs

    Many Canadians run into further financial problems as they attempt to “repair” their credit because they fall victim to credit repair scams. Credit repair services are different from not-for-profit credit counselling agencies. The latter are typically a free service offering non-profit financial education and advice. But back to the scams, here are the warning signs that a company offering credit repair services is likely a scam: 

    • They request an “upfront” payment (this is illegal under Canadian consumer protection laws)
    • They offer instant approval for loans or other credit products without fully understanding your financial situation
    • They call themselves a “credit repair company” 
    • They request payment by gift cards
    • They use high-pressure sales tactics
    • They say they “erase” your negative credit information
    • They don’t provide a transparent contract (or any contract at all)
    • They warn you against contacting a credit bureau

    How to rebuild your credit in Canada

    Accurate negative information on your credit report cannot magically go away; it’s there until it falls off your credit report, which takes about six years. If your credit report isn’t great, the only way you can go about “fixing” it is by rebuilding it with a positive credit history. You have to show your creditors that your financial habits have improved, which takes time. Here’s what you can do to get the ball rolling: 

    1. Review your credit

    It is important to review your credit report regularly by getting a free copy of your credit history from both Equifax Canada and TransUnion. Look over the report to see what’s documented and if the information is correct. For no charge, you can remove incorrect information by filing a dispute with the credit reporting company.

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    Special to MoneySense

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