Loans, Lines of Credit and Mortgages

Understand your financing options to make the right choices

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Understanding Types of Financing

In Canada, there are several ways to get financing: personal loan, line of credit, or mortgage loan.

Depending on your situation, these options may be accompanied by optional insurance, or mandatory mortgage insurance if you buy a house with a down payment of less than 20%.

This section presents the main points to know to better understand your financing choices and ask the right questions before committing.

Understanding Types of Financing: Choosing the Right Solution

1️⃣ Types of Financing

Several forms of financing exist in Canada. Understanding the basics helps make the right choices.

Financing Type	Description	Typical Interest Rate	Duration	Best For
Personal Loan	Fixed amount to repay according to established schedule	6% - 15%	1 to 7 years	Specific projects, debt consolidation
Line of Credit	Flexible amount available anytime, use only if needed	5% - 12%	Renewable	Emergencies, occasional needs, flexibility
Mortgage Loan	Intended for real estate purchase, with repayment over several years	3% - 7%	15 to 30 years	Property purchase, refinancing

💡 Details of Each Financing Type

🏠 Personal Loan:

✓ Amount generally between $1,000 and $50,000
✓ Fixed and predictable monthly payments
✓ No collateral required (unsecured loan)
✓ Approval based on income and credit

💳 Line of Credit:

✓ Limit generally between $5,000 and $100,000
✓ Interest paid only on amount used
✓ Minimum monthly payment (generally 2-3%)
✓ Can be secured (with property) or unsecured

🏡 Mortgage Loan:

✓ Amount up to 95% of property value
✓ Property serves as loan collateral
✓ Terms of 1 to 10 years, amortization up to 30 years
✓ Fixed or variable rates available

💰 Example: $25,000 Financing Comparison

Option	Rate	Monthly Payment	Total Interest (5 years)
Personal loan (7%)	7%	$495	$4,700
Unsecured line of credit (9%)	9%	$67 (min. 2%)	Variable according to repayment

Conclusion: Personal loan offers predictability, line of credit offers flexibility, and secured line offers the best rate.

2️⃣ Loan Insurance

Loan insurance is generally optional and protects in case of inability to repay.

Types of available insurance:

Life insurance: Repays balance in case of death
Disability insurance: Covers payments in case of work incapacity
Job loss insurance: Temporary help in case of involuntary job loss
Critical illness insurance: Repays in case of covered illness diagnosis

⚠️ Important Points to Consider

Cost: Generally 0.5% to 2% of loan amount per month
Coverage: Often limited by age and pre-existing conditions
Alternative: Your personal life insurance may be more advantageous
Choice: You are never obligated to accept these insurances

💰 Example: Insurance on $25,000 Loan

Auto loan of $25,000 over 5 years:

Life + disability insurance: ~$35 per month
Total cost over 5 years: $2,100
Alternative: $100,000 term life insurance = ~$25 per month

Tip: Always compare with your existing personal insurance.

3️⃣ Mortgage Insurers in Canada

If you buy a house with less than 20% down payment, mortgage insurance is mandatory in Canada.

Main insurers:

Insurer	Type	Typical Premium	Particularities
CMHC	Government	0.6% - 4.5%	Most used, strict standards
Sagen (Genworth)	Private	0.6% - 4.5%	Similar criteria to CMHC
Canada Guaranty	Private	0.6% - 4.5%	More flexible on certain criteria

🏠 Example: $400,000 House with 5% Down Payment

House price: $400,000
Down payment (5%): $20,000
Mortgage amount: $380,000
Insurance premium (4%): $15,200
Total mortgage: $395,200

Note: Premium can be paid cash or added to mortgage.

4️⃣ Auto Financing

Buying a vehicle can be done in several ways, each with its advantages and disadvantages.

Auto financing options:

🚗 Where to Finance Your Vehicle

Dealership: Convenient, sometimes 0% promotions, but compare rates
Bank/Credit Union: Often better rates, pre-approval possible
Broker: Compares multiple lenders, good for difficult credit
Personal loan: More flexible, but generally higher rate

🚙 Example: Financing a $30,000 Car

Source	Rate	Duration	Monthly Payment	Total Interest
Dealership promotion	0.9%	5 years	$509	$540
Bank	4.5%	5 years	$559	$3,540
Personal loan	8%	5 years	$608	$6,480

Warning: 0% promotions may have conditions (no rebate, specific models, excellent credit required).

⚠️ Traps to Avoid

Too long duration: More than 6 years = risk of being "upside down" (owing more than value)
Inflated insurance: Check if you really need it
Unfavorable trade: Negative balance from old vehicle added to new loan
Bi-weekly payments: May seem lower but cost more in total

❓ Frequently Asked Questions

Q: What's the difference between a loan and a line of credit?

A: A loan gives you a fixed amount to repay according to an established schedule. A line of credit gives you access to a maximum amount you can use as needed, paying interest only on what you use.

Q: Should I take the insurance offered with my loan?

A: No, these insurances are optional. First compare with your existing personal insurance which may offer better coverage at lower cost.

Q: Can I avoid CMHC mortgage insurance?

A: Yes, by putting at least 20% down payment. Otherwise, mortgage insurance is mandatory in Canada to protect the lender.

Q: Is fixed or variable rate better?

A: It depends on your risk tolerance and economic forecasts. Fixed rate offers predictability, variable can be advantageous if rates drop.

Q: How to improve my approval chances?

A: Maintain a good credit file, reduce existing debts, have stable income and prepare a down payment if possible.

💡 "Decode Finance" Expert Tip

Before committing to any financing, ask yourself these questions:

Do I really need this financing now?
Can I comfortably make payments even if my situation changes?
Have I compared at least 3 different options?
Have I read and understood all terms and conditions?

Pro tip: Always negotiate. Posted rates are often just the starting point, especially if you have a good credit file.

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