Navigating unexpected financial needs can lead us to explore avenues beyond our savings. While relying on your own funds is often preferable, life’s uncertainties can necessitate seeking alternatives like borrowing money.
However, we must make informed decisions when considering the best ways to borrow money. It’s vital to recognize that not all borrowing methods are equally advantageous; certain approaches entail more financial implications than others.
Factors such as low-interest rates, transparent fees, and adaptable repayment terms should guide your pursuit of the ideal arrangement. Efficiently weigh multiple alternatives against your financial framework to pinpoint the most suitable option, securing funds at the most favourable rate attainable.
In this article, we will share the 7 best ways to borrow money fast in Canada to help you settle your financial emergencies.
The 7 Best Ways To Borrow Money in Canada
Borrowing money becomes a practical solution, whether it’s for a new home, education expenses, or venturing into a business endeavour. Regardless of whether you’re striving for optimal interest rates or urgency in acquiring funds, you must thoroughly evaluate your choices before deciding.
Here, we will discuss the seven best options to consider when you want to borrow money in Canada:
1. Banks
Banks serve as longstanding funding sources for individuals seeking financial support, such as purchasing a new home or covering college tuition expenses.
Within the realm of borrowing, banks offer a diverse array of options that cater to various needs. These include mortgage products, personal, auto, and construction loans. Moreover, the opportunity to refinance an existing loan at a more favourable interest rate is also extended by banks.
While banks may provide minimal interest returns on the funds held in accounts, they counterbalance this by imposing higher interest rates on the funds disbursed as loans. This differential, commonly called the interest rate spread, constitutes a significant revenue stream for banks.
For individuals searching for a reliable source of funds, their bank stands as a viable solution. Acquiring a loan from a bank is generally swift, provided the requisite criteria are met. Interest rates, however, may differ across different banks, yet the advantage of securing a loan with a low-interest rate from one’s bank remains accompanied by the flexibility of repayment periods.
Pros of Borrowing from a Bank
- Low-interest rates
- Flexible repayment periods
- Faster loan process
Cons of Borrowing from a Bank
- Interests are tax-deductible
- You may lose your assets
- High standards
2. Credit Unions
Another avenue for swift access to borrowing funds is through a credit union, which stands as a distinct alternative. Unlike banks, credit unions operate as non-profit financial entities, with membership typically based on factors such as occupation, location, or shared affiliations.
The inherent advantage of utilizing a credit union lies in its cost-effective nature. These institutions boast some of the most competitive interest rates and fees available, rendering them an attractive option for borrowing money.
Functioning as cooperative entities, credit unions are governed by their members, individuals united by a common affiliation, whether a specific group, organization, or community. It’s worth noting that credit unions often provide a range of services comparable to those offered by banks, albeit sometimes exclusive to their members.
A core aspect of credit unions is their nonprofit status, which allows them to extend loans at more favourable terms compared to commercial, financial establishments. This translates into lower interest rates and the potential absence of certain fees, including lending application fees.
Particularly for individuals with lower credit scores (below 630), credit unions can be especially advantageous, frequently offering superior rates compared to traditional banks.
Pros of Borrowing from a Credit Union
- Favourable rates
- Low fees
- Easy access
Cons of Borrowing from a Credit Union
- Limited loan options
- Membership payment is required
3. 401(k) Plans
Many workplace-based retirement accounts, such as 401(k), 403(b), or 457 plans, offer employees the option to take out a 401(k) loan.
Typically, these plans permit loans of up to 50% of the vested funds within the account, capped at $50,000, and with a repayment period extending up to five years. Notably, since this is a loan rather than a withdrawal, it remains tax-free. The payments encompass both the principal and interest components.
Uniquely, the interest accrued on a 401(k) loan doesn’t accrue to a bank or commercial lender; it’s actually repaid to the borrower. However, it’s crucial to adhere to the repayment schedule. If payments are not met or discontinued, the Internal Revenue Service (IRS) might label the borrower as defaulting.
One distinctive advantage of retirement loans is that they enable borrowing from oneself. This approach sidesteps taxes and penalties that would apply to a direct withdrawal from a 401(k). Furthermore, these loans tend to carry some of the most favourable interest rates available, irrespective of an individual’s credit score.
401(k) loan interest aligns with the prime rate, augmented by one or two percentage points. Notably, the interest paid circles back into the borrower’s retirement account.
Pros of Borrowing through 401(k) plans
- No application or underwriting fees.
- Interest goes back to the borrower’s account, effectively making it a loan to themselves.
Cons of Borrowing through 401(k) plans
- There may be tax implications for borrowing against your 401(k)
- This will also reduce the amount of money you have when you retire.
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4. 0% APR Credit Cards
Certain credit cards, often called zero percent APR, offer introductory periods ranging from 6 to 21 months, during which no interest is applied.
When used for transactions, the credit card company effectively extends a loan to pay the merchant. If the credit card is used for cash withdrawals, it’s labelled as a cash advance. Intriguingly, credit cards serve as a source of interest-free loans for those who consistently settle their entire balance monthly.
A 0% APR credit card can be a cost-effective borrowing option for those capable of repaying their balance within the introductory window.
For instance, suppose you utilize a 0% APR credit card with a 15-month introductory window to cover unexpected expenses, such as medical bills or car repairs. If you manage to settle the balance after nine months, you effectively borrow money at no interest cost.
Pros of Borrow through Credit Cards
- Fast money access
- It gives you cash advances
- Flexibility
- It helps build a credit history
Cons of Borrowing through Credit Cards
- High-interest rate
- The temptation to borrow more
- Can damage your credit score
5. Peer-to-Peer Lending
Peer-to-peer (P2P) lending, alternatively known as social lending or crowdlending, presents a direct method of financial interaction wherein individuals both borrow from and lend money to each other. This system operates through peer-to-peer online platforms, and it is a distinct approach to financing.
With peer-to-peer lending, borrowers secure funds from individual investors who voluntarily offer their personal money at agreed-upon interest rates. These transactions generally transpire within online platforms designed for this purpose. On these platforms, potential investors assess various borrowers and decide whether to extend loans based on their evaluations.
Notably, a borrower within the P2P lending sphere might receive the entire loan amount required or a fraction thereof. This financing can originate from one investor or be a composite sum contributed by multiple participants in the peer lending marketplace.
Peer-to-peer lending platforms, such as Prosper, exemplify the mechanism behind P2P lending, acting as alternatives to traditional bank loans. These digital platforms offer the convenience of online operations, enabling borrowers to complete the application process within minutes.
Pros of Borrowing through Peer-to-peer
- No interest if you pay off your purchase in four instalments.
- No late fees or other hidden fees.
- Doesn’t impact your credit score if you make your payments on time.
Cons of Borrowing through Peer-to-peer
- It can only be used with retailers that partner with the companies.
- Some payment plans have interest rates as high as 15 percent.
6. Margin Account
A margin account is a specialized brokerage account in which the broker-dealer extends cash to the investor, utilizing the account as collateral. This setup involves a unique mechanism where gains and losses hinge on the fluctuations of the purchased stock.
To illustrate, imagine investing $25 while the broker lends an additional $25, resulting in a total investment of $50. If the stock price climbs from $50 to $60, a $10 gain occurs, leading to a reduced debt of $15. However, should the stock price plummet to $40, the outstanding debt escalates to $35.
Beyond investments, a margin account can also be leveraged for short-term loans to cover non-investment expenses. Regardless of the purpose, any borrowed amount within a margin account incurs interest. Utilizing a margin account for borrowing can be profitable if the invested securities appreciate, yet it can also lead to higher indebtedness if their value declines.
In essence, a margin account empowers brokerage customers to borrow funds for securities investments, using the funds or equity within the account as collateral. Notably, the interest rates associated with margin accounts tend to be competitive and favourable compared to other borrowing options. Additionally, initiating a loan through a margin account is streamlined, particularly if the account already maintains sufficient equity.
Pros of Borrowing from Margin Accounts
- Better interest rates than other sources.
- Pay back your debt by selling securities or paying back cash.
- Rates are typically lower compared to other borrowing options.
Cons of Borrowing from Margin Accounts
- Borrowers may have to provide additional collateral if the price declines.
- Losses may be higher in the event of a downturn.
7. Personal Line of Credit
A personal line of credit functions similarly to an unsecured loan and resembles a credit card’s mechanism. It involves borrowing money with an obligation to repay along with accrued interest.
A notable feature is that as you reimburse the borrowed sum, your borrowing capacity is replenished, aligning with your credit limit. The distinct advantage here is that lines of credit generally offer more favorable interest rates than typical credit cards, rendering them particularly suitable for regular expenditures.
Operating as a hybrid of loans and credit cards, select banks and credit unions offer personal lines of credit. While they share the application scrutiny characteristic of loans, where lenders evaluate your credit history, income, and existing debts, they also borrow the convenience from credit cards. Once approved, you can withdraw only the required sum and accrue interest solely on the utilised amount.
Pros of Borrowing through Personal Line of Credit
- Reuse the line of credit as you pay it back.
- Only pay interest on the amount that you borrow.
Cons of Borrowing through Personal Line of Credit
- Lenders may charge additional fees on top of interest.
- A high credit score is typically required.
What Do I Need To Borrow Money?
Although different lenders have different requirements, here are the common requirements for borrowing money:
- Active chequing account
- Credit score
- Steady Income
- Proof of employment
- Address
- Proof of address
- Social Insurance Number
- Valid I.D.
- Bank statements
How to Pay Off Your Loan Fast
Once you’ve successfully acquired a loan, the next crucial step is initiating a thoughtful repayment approach. Formulating a well-structured loan repayment plan is a pivotal strategy, expediting the process and minimising associated costs.
Consider the following factors when trying to pay off your loan fast:
- Cut your non-essential expenses
- Create an intervention budget
- Pay more than the monthly requirement
- Create a debt management strategy
- Stop investing
- Create additional streams of income
- Grow your emergency fund.
For a comprehensive guide on how to pay off your loan faster, click here.
Final Thoughts on Best Ways to Borrow Money
I’ve shared some of the best ways to borrow money to suit your unique financial needs. Whether you’re considering traditional bank loans, exploring peer-to-peer lending, or opting for credit cards with favourable terms, the right choice depends on your circumstances.
Before making any decisions, assess your current situation, credit score, and repayment capabilities. By making an informed choice, you can secure the financial assistance you need while managing your debt responsibly.
It’s time to take the next step towards your financial goals. Choose the borrowing option that aligns with your needs and start your journey toward achieving your aspirations today.
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FAQs on Best Ways to Borrow Money
Can You Get a Loan with Bad Credit?
Yes, you can get a loan with bad credit. However, bad credit often attracts high interest rates. But you can still qualify for low-interest loans with bad credit in Canada. This includes a car title loan.
Will Applying for a Loan Hurt My Credit Score?
Applying for a loan and redeeming it on time will improve your credit score. However, when you make a late payment, it can hurt your credit score.
What is the Difference Between a Secured and an Unsecured Loan?
A secured loan refers to a loan that is backed by collateral. The aim is to protect the lender in case the borrower defaults. On the other hand, an unsecured loan is a loan that’s not backed by any collateral. The high risk of an unsecured loan makes it have a high interest rate to protect the lender.
What is the Cheapest Way to Borrow Money?
When it comes to borrowing money, there’s no one-size-fits-all. So, the cheapest way to borrow money depends on your needs and circumstances. But the common cheapest ways to borrow money are lines of credit and credit cards in Canada.
