Loans Made Simple: What You Need to Know Before You Borrow

Loans Made Simple: What You Need to Know Before You Borrow explains the basics of borrowing in a clear and approachable way. This episode covers how loans work, the different types available, and what to consider before taking one on, helping you make informed choices and feel more confident about your financial decisions.

Transcript

Coast Capital Savings, a proud supporter of the Thrive Program since 2020, is a member-owned financial cooperative with an 80-year-old legacy of unlocking financial opportunities that positively impact people and communities. Driven by their social purpose of building better futures together, they look at everything they do through the lens of how they can help their 600,000 members, employees, and communities. Ranked in the platinum category of the 2022 Corporate Knights Social Purpose Ranking and a proud Certified B Corporation Registered, they're part of a global movement building a more inclusive, equitable, and regenerative economic system. Each year, they invest 10% of their bottom line into local communities, which over the past two decades totals $100 million. To learn more, visit them online at coastcapitalsavings.com.

Welcome to the THRIVE Podcast, an open space to celebrate diversity, share our perspectives, and promote the abilities of youth with disabilities. THRIVE is a program at the BC Centre for Ability and is generously sponsored by Coast Capital Savings.

This podcast is produced on the traditional lands of the Coast Salish peoples. I'm your host and producer, Anu Pala. Welcome back to our Financial Literacy Series. Today we're talking about loans, something most of us will encounter at some point, whether for education, a car, a home, a business, or unexpected expenses. Loans can be powerful tools, but when misunderstood, they can create stress and long-term financial strain. In this episode, we'll explore what loans really are, how they work, and why not all loans are the same. We'll focus on making informed choices that fit your values, goals, and circumstances. Financial literacy isn't about perfection. It's about understanding your options and having the confidence to choose what works best for you. So let's take a breath and dive in. Once again, I'm delighted to welcome back Coast Capital Savings Financial Education Manager, Brenda Mah. Hi, Brenda. 

Brenda: Hi, Anu. Thanks for having me. 

Anu: Thanks again for taking time to be here with us. Today's topic is loans and understanding how borrowing works.

Brenda: Sounds great. 

Anu: So let's start by talking about loans. What are loans and why do people want them? 

Brenda: Yeah, Anu, so loans are really unavoidable. Of course, you know, no one wants debt, but at times it's really necessary to have that debt. So a loan is basically a vehicle that you use to borrow money. So you're essentially borrowing money for someone for a specific purpose with the agreement to pay back over a certain period of time in equal payments, installments typically, until that loan is paid off with, of course, a little bit of interest on top. 

Anu: We're talking about it from banking context, but I know people who are private lenders as well. And so sometimes people will loan someone money like that as well. 

Brenda: Yeah. So typically when you go to a private lender, I mean, that can look a bunch of different ways. Like it could be friends and family. Usually, hopefully, the interest and the repayment terms are a little bit better when it's friends and family. But there's also organizations or businesses that find investors that will lend their money out for a higher interest. And typically, the interest when you're going private is going to be a little bit more expensive. And, you know, usually people that have a tough time getting approved will go with someone that's private. 

Anu: So I think that's one thing for people to know is that just kind of be mindful of that. Because I know of some people who have borrowed money from private lenders, and they have charged quite a significant higher interest rate. I know sometimes, you know, when you really need the money for something, you'll just do it, you know, you just go for it. But I think it's just something to really be cautious about. Not cautious, but just mindful, I'd say. 

Brenda: Yeah, one of the ones that people use all the time that we forget are private is, you know, cash stores. So places like Money Mart, Western Union, those places are privately owned organizations that are really there for profit. And so they do charge quite a bit more. So we at times can see between 30 and 50% interest when you actually look at the agreement close. 

Anu: Wow, that's scary. 

Brenda: Essentially, the payments that you make are, you know, you're really just covering the interest. You're never really going to pay that down. So it's a really difficult cycle to get out of. So we really highly encourage people to go to their financial institutions, go to their banks, go to their credit unions, rather than going to a money store like that. 

Anu: Good advice. What are the three general things that lenders look for?

Brenda: The things that typically a lender will look at, so I can speak specifically in terms of credit unions and banks, they look at your credit history. They look at your employment. So they look at the job stability. How long have you been there? What kind of job is it? Do you have permanent employment? And what kind of industry or field? Is it a field where, you know, it's pretty stable? There's not a lot of turnover. So, for example, you know, maybe a government job, something in the medical field, pretty stable. There's not a lot of layoffs in those areas. So we do look at that. That doesn't mean that, you know, we don't look at any other, but we do definitely favour, you know, positions in employment where there is some stability. The other thing we do look at is your income. So can you actually afford this loan? If we gave you this loan, would you be able to make the payments back based on all your other expenses and what you make? But really importantly, the credit history is really important. You know, credit history is a measure of how in history you've previously paid your bills. And so it gives the financial institution a good indicator as to how you pay. Do you pay on time? Are you a credit seeker? How often do you check your credit or try and get more credit? And so there's a lot of myths around credit. And so it's important to kind of check your own credit once a year and see where you're at and where you need to improve.

 Anu: Okay, so I have a question, a follow-up question to that. You know how there are companies like Equifax where you can determine your financial health? I've heard that when you, I think like when you, like each time when you run a check like that, it impacts your credit in some way or there's something there. I don't know the exact wording for it. But I've heard that it's not a good idea to run too many checks. 

Brenda: Yes, that is absolutely correct. So your credit score is really made of a few different things. You know, paying your bills on time. So your repayment history is important that you pay your bills on time, even if you don't pay the full balance off, for example, on your credit card, but at least making the minimum payment. That's worth about 35% of your score. 30% is around debt utilization. So if you have a thousand dollar credit card, how much of that are you using? So try and keep it around 30 to 35% of your limit. So if you're always maxed out, it doesn't look great. That will typically lower your score, how long you've had your credit cards for and how often. So what you were just speaking about, you know, if you are checking it constantly, it starts to look like you're a credit seeker. One of the things we see all the time is individuals going to shop for a car. They'll go from dealership to dealership, not realizing that every dealership they've gone to has checked their credit. And that really will lower it because there's so many checks in such a short period. So we definitely would say limit your checks. When you check your own, you can check it once a year. There's apps that you could use to check it, but if you're checking your own, that doesn't affect your score. It's when others check it. 

Anu: And do you have to pay to get your credit score checked? 

Brenda: Yeah. So in Canada, there are two organizations that collect the data. There's Equifax and there's TransUnion. They allow you to check your score for free once a year. Okay. You can also use apps like Credit Karma that are free. Your credit update is, you can check it all the time. I think there's like just a lot of ads and stuff on there, but it is for free and it doesn't affect your credit. 

Anu: So credit karma. 

Brenda: Yeah.

Anu:  Oh, very cool. 

Brenda: There's many out there. That's just one of them. 

Anu: Okay, great. What are the terms and conditions of a loan? 

Brenda: So when you're taking a loan, typically a loan will have repayment conditions. So you want to choose how long you want to pay that back over. So the shorter the period, the higher the payments will be. You can go anywhere between one and five years. Typically, we've seen up to seven and eight years. But most financial institutions like to stick between one and five years. And so if your payments are over five years, of course, you're going to have longer to pay it out, which means that your payments are lower. You also need to choose how often you pay. So if you are paying monthly, that's, you know, once per month you make payments, or you can choose to do bi-weekly. That's a very common and popular one. Because you're paying 26 payments throughout the year. You're paying it off a little bit faster versus the once a month. And then you can also choose to make lump sums. So most personal loans are open, which means that you can make extra payments on top of your regular payments, or you can choose to make a lump sum payment to pay it down a little bit faster. Typically, loans are open and very flexible.

Anu: So if a person pays bi-weekly, do they get a break on the interest rate, or does the interest rate remain the same regardless of how you pay that loan back? 

Brenda: Yeah, so interest rate is determined by a few different things. Most of the time, interest rates are based on the Bank of Canada rate. So typically, it will be prime, so the Bank of Canada prime plus a certain percentage. So it could be prime plus three, prime plus four. And when they choose a rate for you, it's dictated by a few different things. So, you know, the longer the term, the more risk there is for the institution. The shorter the term, the quicker you're going to pay it off is less risk. So maybe you'll have a little bit lower rate. The other thing they look at is your credit history. Another reason why your credit history is important is if they see that you have good credit, then you might potentially get a lower rate because a lot of times the interest rate is a measure of risk. And so if you have good credit, then you may get a better rate. If you have poor credit, they may charge a bit more because it's a little riskier for them to lend that money out to you. But in terms of payment frequencies, that doesn't typically change the interest and also the relationship that you have with your financial institution. If there's anything that they can hold as collateral, as security, so maybe like a car, you may get a little bit better interest rate that way because they have some security in place, which is why mortgages have much lower rates than personal loans because there's a home that they're holding as collateral. Typically, if you think about interest, it's like a measure of risk. 

Anu: Okay. So what are the other types of debts in addition to loans and the different types of uses? 

Brenda: Yeah. So there's a few variations in terms of loans. There are credit cards. So essentially, credit cards are a form of loan because you're using a card to purchase things with money that doesn't actually belong to you. So you're borrowing that money temporarily. When you use a credit card, the credit card rates are quite a bit higher, but it gives you that flexibility to be able to use at any store. So different types of loans, definitely for sure. One of the other ones is a line of credit or an overdraft. So an overdraft, you're essentially, maybe you wrote a check on your account, but you don't have the money in there to cover it, but the bank will cover it for you, even though you don't have the money. So that's essentially a loan again, rather than having it bounce, they'll cover it, but they're going to charge you interest. A line of credit works pretty much the same. It's revolving. So there's, you know, you're constantly being able to like pay it and reuse it, pay it and reuse it. But the interest rate on a line of credit is going to be quite a bit better than say an overdraft. So they're going to look a little closer into like your credit history, your employment and your affordability before they give you that line of credit. Whereas a lot of times the overdraft doesn't go through all the qualifications, so the rate will be much higher. Line of credit's typically about the same as loans. It's usually based on a variable rate, depending on the Bank of Canada. And again, it is revolving, so a little bit more risk for them because that money's out there for you to use basically forever. 

Anu: Well, this has been really interesting, Brenda. I think loans and debt, this whole topic, it's really important for people to understand how it works, the risks, and the benefits as well. 

Brenda: Yeah, there's definitely a need for loans. Of course, again, no one always ever wants debt, but there's definitely at times where it is useful. There's something called good debt and bad debt. And, you know, if you have good debt, it really is debt that you're taking to improve your financial situation. And so we just remind people that, you know, yes, of course, no one wants debt, but there are times where it can help, you know, having that debt can help you move your financial situation forward.

Anu: Awesome. Well, thank you again for sharing all this amazing information. 

Brenda: Thanks, Anu. 

Anu: And we'll see everybody in the next episode. 

This brings us to the end of our episode. Thank you so much. I want to give a huge shout out to Coast Capital Savings for their ongoing support of the THRIVE program. Thank you so much. I hope that today's topic resonated with you. And if it did, remember to share it far and wide with your networks. You never know who it might help. And while you're doing that, remember to like, follow and leave a review. Thanks for listening and we'll see you next time.