We are all about partnerships at Momentum. We know that we cannot do everything and that many of the people in our community have knowledge and expertise that we can learn from. It is in the spirit of learning from our community members that we present the following blog post from guest blogger Douglas Hoyes, Founder & Trustee of Hoyes, Michalos & Associates.
If you would like to know more about making good debt choices, join us for FREE Money Management workshops on Monday evenings or Tuesday afternoons.
Are You Making Good Debt Choices?
By Douglas Hoyes, Founder & Trustee of Hoyes, Michalos & Associates
Unfortunately, financial responsibilities don’t stop just because you’re low on cash. Monthly bills and expenses must still be taken care of, but sometimes it’s not quite clear exactly how to go about doing that when money is tight. Should you borrow money, and if so, what’s the best way to go about doing that?
If you borrow money, you have to pay it back with interest, and that’s expensive, but what else can you do? How do you choose the right loan?
My advice is to ask yourself two important questions so that you can decide whether or not you are making good debt choices.
Question #1: Can I avoid borrowing?
Let’s start with an example: Your rent is due tomorrow, and you don’t have the money to pay it. Do you have any options other than borrowing money for rent?
The answer is yes, there are always options. It’s up to you to decide if you can make any of them work.
You could ask your landlord for some extra time until your next paycheque, or you could ask a friend or family member to help you out, so that you can avoid high interest charges.
Once you get past this month’s rent hurdle, start right away to put some money aside for next month.
Avoiding borrowing is only possible if you stop spending and start saving.
Question #2: What is the cheapest way to borrow?
If you must borrow, you should borrow at the best terms possible. You want a low interest rate, and a reasonable time to pay back the loan.
Those two goals don’t always mean the lowest monthly payments. Let’s look at another example.
You pick out a used car that would mean you’d have to borrow $22,000. Your bank says they will loan you the money with a four-year bank loan and your monthly payments would be $464.
Now your used car dealer says, “I’ll sell you a better car for just $25,000 and I’ll make your monthly payments $386.”
Sounds good, but should you take the deal? The truth is, to get those payments down to $386, your car dealer offered you a six-year car loan.
That means paying much more for your car over time. It’s going to cost you more interest, your car will be worth less once you pay it off and you might not save the difference in the two payments so you have money put away for your next car.
Always avoid the most expensive options.
The most expensive loans are payday loans. It’s not unusual to borrow $400 and be required to pay back $500 in two weeks when you get your next paycheque. $100 may not appear to be a lot of money, but if you paid $100 in interest every two weeks, over an entire year you would pay $2,600, which on a $400 loan is 650 percent annual interest — that’s huge! And spending that money on interest means you can’t spend it on things you need. If possible, avoid payday loans.
Credit cards are the next most expensive form of borrowing, with interest rates on store and gas credit cards as high as 29 percent. It is always wise to avoid carrying a balance on your credit card.
A bank loan or line of credit is the least expensive form of borrowing, but to qualify, you may need a co-signer, so only borrow if you are sure you can pay it back.
When you do borrow, always pay it back as fast as you can so you pay less interest. The less interest you pay, the more you can save for something else.
What if I already have too much debt?
If you already have debt, your goal should be to get out of debt as quickly as possible to stop the interest charges. Make a budget, and start by paying down your high interest debts first. If that doesn’t work, talk to a credit counsellor or a bankruptcy trustee for other options.
When cash is tight, it’s not always easy to make good debt choices, but it is in your best interests to read the fine print, crunch the numbers, and keep your debt as low as possible.
About the Author
Doug Hoyes has extensive experience resolving financial issues for Canadian citizens. A Licensed Bankruptcy Trustee and co-founder of Hoyes, Michalos & Associates, he is also a Chartered Professional Accountant (CPA), Chartered Insolvency and Restructuring Professional and Business Valuator. He regularly comments on a variety of TV, radio and other media outlets on topics surrounding bankruptcy and writes a column for the Huffington Post. Hoyes has been a Licensed Trustee since 1995 and has testified before the Canadian Senate’s Banking, Trade and Commerce Committee in 2008.