Sooner or later, nearly all of us will take out a loan. Whether it’s big or small, having debt means taking on a serious obligation. Here are some ways to prepare yourself for borrowing money:
Have a good understanding of why you’re borrowing. Not all debt is created equal—are you taking on good debt or bad?
Good debt improves your net worth, income or future finances. A student loan can improve your career prospects; when you borrow money for work equipment, the income increase can help pay back that loan; a mortgage can give you secure housing and a base of equity.
Bad debt costs money in interest, but doesn’t give you anything back. Things that lose their value and are non-essential items make up the most bad debt. This type of debt is often high-interest, such as credit card debt or a payday loan.
Have a plan to repay it. It’s important to understand your timelines. Some loans, like mortgages, have specific amortization periods and a payment structure built in. Others, like lines of credit, are completely up to you to manage. Taking on debt without knowing how you’ll repay it can be dangerous.
The quicker you’re able to pay down the principal—the initial amount borrowed—the lower your interest payments will be in the long term. It’s a good idea to look at your income and then calculate how much principal and interest the loan will have, to help determine how much you’ll be able to pay back each month.
Bolster your financial knowledge. Debt and interest can be complicated. Different loans use different structures, and not everyone knows how to calculate compound interest. But there are free resources available for Canadians to learn how to manage their money, like Money Matters, a free introductory financial literacy program.
Taking a course can help you better understand the terms and concepts behind your loan and your options when it comes to taking on debt. Having a solid base of knowledge can help you deal with debt more safely and confidently. You can learn more and find free resources at abcmoneymatters.ca.
