Choosing a lender

The cost of a loan will vary depending on the type of loan you seek and the lender’s policies regarding interest rates, fees, savings requirements, and collateral.  Before you borrow, compare the costs of the loan you want among several lenders.

Choosing a lender is not only about costs. You might also want to consider the following:

  • Location (Is the lender close to your home or business?)
  • Product offerings (Does the financial institution offer other types of loans or savings services that interest you?)
  • Customer service (Do you feel comfortable there? Is the staff friendly and helpful?)

How much Debt can you afford?

Too much debt can cause serious problems. The term “over-indebtedness” refers to household debt that is too high relative to household income.  How do you figure out how much debt is too much?  Unfortunately, there is no rule of thumb about a safe debt-to-income ratio, although 20 to 30 per cent of household income is widely used.  Should your household always avoid carrying more than one loan at a time?  Not necessarily, especially if you face a crisis and need cash urgently.

Before taking on a loan, you should consider both the costs and risks of borrowing. Answer the following questions based on your own circumstances:

  • What percentage of my household and/or business budget can I afford to make available for debt repayment? Will I have enough left over to adequately cover other household expenses?
  • Can my guarantors afford to repay my loan? How will they feel towards me if they have to do so?
  • What are the consequences if I cannot repay my loan? What is the value of the collateral (for example, a motorbike, house, etc) I have pledged?

As a borrower, the debt trap can sneak up on you.  Because it occurs slowly, you may not see it coming. Suddenly you owe more than you can afford to pay and the way out is nowhere in sight! The persistence of debt is one factor that keeps poor people in poverty. For most of us, living with debt has always been and continues to be a reality. Because your need for credit typically does not go away, you are likely to renew existing loans.  In fact, given ever-changing circumstances, at some point, you may need more than one loan at a time. This can happen when you are faced with an unexpected crisis and need cash urgently.

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