Applying for a loan

When you decide to apply for a loan make an appointment at your branch or these days you can apply online. However, if you are new to the world of credit I recommend that you go to your branch, then you can ask questions and have them answered to your full satisfaction before signing on the dotted line. The loans officer or your financial services representative (FSR) will complete a loan application form, based on the information you supply and after they have done a credit check your application will be approved or declined.

Types of loans

Before you apply for a loan it may help you to know what types of loans are available. Speak to your branch office or visit your financial institution on line to learn more about the products they offer.

Personal line of credit (PLC)

A personal line of credit is a very flexible way to use credit; your financial institution will make funds available to you up to a preset limit – the funds will be ready for you whenever you need the money. Just write a cheque or transfer the funds to your account. Usually a PLC is set up as a separate account number. You will pay no interest charges until you use some or all of the funds that are available to you under your PLC agreement. Some companies however, may charge you a “fee” just to have the PLC in place. (Read the agreement before you sign it)

PLCs usually have a required monthly payment in order to keep the account current, in some cases you may only be required to pay the interest charges per month while other companies may require some interest and principal be paid. Payments must generally cover at least 3% to 5% of the outstanding balance.

Most financial institutions that provide PLCs start their credit limits at $5000. If you qualify for one these loans usually cost less than a personal loan. The interest on a PLC is usually related to prime and is adjusted monthly. A PLC can be a very useful financial tool. Some of my clients have been living on their PLCs for years. PLCs are available at banks, finance companies, credit unions and trust companies.

Overdraft protection

Overdraft protection allows deposit accounts (usually chequing accounts) to become overdrawn to a preset limit, for instance $500 - $5000. The overdraft becomes a loan that is subject to interest rates as high or higher than those charged on credit card loans. If you need an overdraft on your account I recommend a maximum amount of $500. Having an overdraft on your account is nothing more than a “payroll” loan – you are spending money from your next paycheque but unlike the payroll loan advance - companies that I am always warning you about – overdraft protection will not cost you an arm and a leg in fees.

Credit card cash advances

Some credit cards provide the option of cash advances; there is no need to apply each time you wish an advance. Simply go to the cash machine use the personal identification number (PIN) provided by the card owner and presto! You have cash! Interest is calculated daily and begins at once – usually interest rates are higher than those charged for a PLC or a personal loan. The rates for cash advances on the cards can be higher than if you use the card to make purchases. Some cards have a transaction fee for cash withdrawals - so be careful!

Demand loans

Demand loans are loans that are granted with a specific prepayment date already set up. The loans usually have interest charges due each month and the lender has the right to recall the loan at any time. Holders of these loans usually renegotiate them at maturity. Interest charges will be set slightly above the prime rate and will fluctuate according to the prime rate. When I was a lender I granted these loans mostly to business customers.

Prime rate

The prime rate is the lowest interest rate that financial institutions charge – it is offered to their best corporate customers. Most loans are granted as prime + several percentage points. The prime rate also serves as a guide for setting other interest rates – such as mortgages and other lending. Prime is set by the Bank of Canada once a week and is based on many economic factors.

Installment loans

Instalment loans are loans that usually have a set interest rate, a maturity date, a repayment schedule and sometimes a security requirement. This type of loan is used most often when buying a car or when using a loan to consolidate other debts. Instalment loans can be very useful when trying to get out of debt. Many of my clients have told me they would rather “go to the dentist than ask for a loan”. Consider all the factors before you apply for credit and if your bank turns you down for a loan. Remember you have other Solutions.