Which Credit Tool is right for you?

Here is a table to help understand the basics of some commonly used credit or loan products. Understanding the basics will help you choose the right tool for the job.

Personal Loan• Funds advanced directly to you from your bank or credit union to purchase a car, bike, renovation, consolidate debt
• Loans can be open, paid off in full with no penalties, increase the monthly payment to pay down faster and save on interest charges Loans can be fixed (fixed payment schedule)
• Purchases made with a personal loan can end up costing more due to the interest charges than it would if you saved up the money before buying it.  
Line of Credit• Pre-approved amount that allows you to borrow money when you need it
• Considered revolving debt as it allows you to use the funds, repay the funds and use the funds again based on the credit limit
• Can have lower interest rates than other credit products (even lower if secured to your property called a Home Equity Line of Credit “HELOC”)
• Interest rate is often variable and not fixed, meaning it can rise and the amount of interest you pay will increase
• Minimum monthly payments can sometimes be interest-only payments, which can lead to increased debt amounts with no schedule to pay off
Over Draft• Most banks and credit unions offer on their chequing accounts and provide the account holder access to more funds than what is in their account without causing your payment by cheque or debit card to be rejected due to nonsufficient funds “NSF”
• Interest rates are generally higher, and there may be an additional fixed fee each time a cheque or withdrawal puts the account into or further into overdraft, therefore this type of credit should only be used for a very temporary term or an emergency
• Funds must be paid by the terms and conditions of the institutions, can be 30 days up to 90 days.
Credit Card• A credit card is the physical card that allows you to make purchases using a pre-approved loan up to the maximum for which you are approved
• It is considered a short-term convenient way to bridge between making purchases and paying for them by the monthly payment date.
• There is an interest free period that runs from the date of the purchase until the due date on the monthly bill. If the bill is paid off in full, no interest is charged. If the payment is not made in full, interest is charged, and continues to accumulate until the bill is paid in full. Cash advances are also available, but interest is charged daily from the day you withdraw the funds
• Borrowing limits on credit cards depend on your income, debt load and credit rating
• Interest rates depend on the issuer and transaction types and can be between 10-30%
• Credit cards are very convenient, but can easily drive the cost of items up significantly if the full balance is not paid for each month. Good credit card hygiene involves paying the full balance each month, and at the very least the minimum monthly payment on or before the due date.
Mortgage• This is a type of loan used to buy a home or other property (cottage, farm)
• Your home or property is used as a security for the loan amount
• Amounts vary based on income, debt load and credit history, property value and can typically be one of the largest debts you will ever have since it is related to the most valuable asset you will ever own: your real estate
• Different lenders have options for repayment flexibility and rates, terms and payment schedules; amortization and additional costs (closing costs, default insurance, etc.) are also something to consider  
• Loans advanced for education costs that have attractive interest rates and special repayment terms for students
• Can be guaranteed by the government or you may earn grants to alleviate some of the repayment
• Repayment normally does not start until you have finished your educational studies
• Some students are left with a large amount of debt after graduation

It is important to ensure you are using the most appropriate lending product for your borrowing needs. Understanding the advantages and disadvantages will help you make a wise and logical decision in how you will borrow funds.

We hope you will find this information valuable and will increase your financial confidence. You can always find these articles on our website www.actionfinancialgroup.com.

Karin Rimnyak, Certified Financial Planner®
Investment Advisor
Insurance Advisor, Action Financial Group Ltd.

David Dryburgh, Certified Financial Planner­®
Investment Advisor

Insurance Advisor, Action Financial Group Ltd.

Ian Barrie, Certified Financial Planner®
Investment Advisor

Insurance Advisor, Action Financial Group Ltd.

This information has been prepared by Karin Rimnyak who is an investment Advisor for iA Private Wealth. Opinions expressed in this email are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.