How to Understand the True Cost of a Loan

By: Cliff Ritter on November 12, 2012

Canadians continue to have an appetite for borrowing money.  Record low interest rates have fuelled demand amongst Canadian consumers to borrow money for big ticket purchases.  Unfortunately, as the demand for borrowing has continued to rise, understanding what borrowing truly means for you and your credit has not appreciated with that demand.   The fine print of a loan often goes unread, and many Canadians struggle to understand what they have truly gotten into.

Consumer finance specialists recommend you to review carefully all the details that go into managing a loan before agreeing to it.  In today’s economy, buyers often focus on monthly payments for a purchase rather than the long term cost a loan adds to that purchase.  It is best to incorporate this borrowing cost into the purchase, before agreeing to a loan to finance it.  Also, be sure to work with lenders by being upfront about any debts you have.  Sharing this information with your lender of choice will allow you to work as a team, in order to prevent you from taking on a loan that you may not be able to manage.

With interest rates so low, it is normal to be attracted to options for financing, but it is important to incorporate monthly or yearly fees for a loan.  It is always important to ask this question before signing on the line because these fees can translate into what lenders describe as “the effective interest rate”.  Furthermore, keep track of the monthly payment dates on the loan.  They may not match your pay dates, and if you miss the cutoff date for a payment, it could cost you an extra fee or even lower your credit score.

Always keep in mind that should you become dissatisfied with the item you purchased, the loan you used to pay for the item must still be repaid, and you are liable to fulfill that obligation.  Bear in mind as well that nothing in life is free, and you should be careful not to let advertisements claiming ‘free’ or better terms prevent you from understanding the true cost of a loan.

In short, read the fine print and incorporate the true cost of a loan into financing plans before signing on the dotted line.