Whether you’re using a credit card or making a purchase through store financing, borrowing money is a financial commitment. Before signing an agreement, it’s important to understand what you’re agreeing to and how much it will cost.
A monthly payment might look affordable, but do you know how much you’ll actually pay over the life of your agreement?
Here are five things to consider before taking on credit.
1. Understand the cost of borrowing
When you borrow money, the amount you repay is often more than the amount you originally borrowed. Interest and applicable fees can add to the overall cost.
For example, if you borrow $10,000 and repay $12,500 over the term of your loan, the total cost of credit is $2,500.
Pay attention to both the annual interest rate (AIR) and the annual percentage rate (APR). The AIR reflects the interest charged, while the APR includes interest and applicable administrative fees.
Understanding the difference can help you compare certain borrowing options.
2. Look beyond the monthly payment
A lower monthly payment doesn’t necessarily mean a cheaper loan. A longer repayment period could mean paying more in interest overall.
Before agreeing to a payment schedule, consider the total amount you’ll pay and whether the payments fit comfortably within your budget.
3. Ask about additional fees and charges
Interest isn’t the only cost to consider. Ask whether there are administrative fees, optional services or other charges associated with the agreement.
Take the time to review the full agreement so you understand what you’re paying for and whether any additional services are optional.
4. Understand your repayment options
Your financial circumstances can change, and you may decide you want to pay off your loan sooner than expected.
Under BC law, you generally have the right to pay off your outstanding credit balance without a penalty, with some exceptions, including mortgage loans.
It’s worth understanding your repayment options and any applicable conditions before signing.
5. Read the agreement before you sign
It might be tempting to focus on getting approved or securing a purchase, but don’t rush through the paperwork.
In BC, there are requirements for disclosing the cost of certain types of credit. These requirements help you understand important information about your agreements, including borrowing costs and repayment terms.
Make sure you receive and review the required disclosures, ask questions about anything you don’t understand and keep a copy of your agreement for future reference.
Know your rights when it comes to credit
Understanding the cost of borrowing can help you make informed decisions and avoid surprises down the road.
Want to learn more about your rights when borrowing money? Visit our Cost of consumer credit page. For additional tools and information about managing your finances, visit the Financial Consumer Agency of Canada.