The Top 5 Reasons To Consider A Low-Interest Loan

This article is sponsored by our partners at Motusbank in celebration of Financial Literacy Month.

Take a breath — no scary talk about how all debt is bad here! A low-interest loan isn't scary. In fact, it can have its advantages in many situations and there are times when all of us could use a helping hand.

That helping hand could come as a secured or unsecured low-interest loan. Compared to alternatives like payday loans and credit cards, a low-interest unsecured loan offers several advantages, like lower interest rates and collateral usually isn’t required (i.e. mortgages are secured and your house is collateral). A single loan is much easier to manage than playing a balancing act between several high-interest credit card accounts.

Here are a few reasons for when it might make sense to consider a low-interest loan.

1. Consolidate existing debt

Consolidating existing debt is one of the most common reasons for taking out a low-interest loan. Just imagine: you have multiple high-interest credit cards with varying interest rates, balances, and due dates all on the go. That’s a recipe for financial disaster!

Wouldn’t it be much easier to consolidate all that together and have one manageable payment each month? When you apply for a loan and use it to consolidate existing debts, you’re combining all outstanding balances into one monthly payment. Grouping your debts makes it easier to work out a timeframe to pay off balances without the juggling act that comes with credit cards.

One of the best reasons to use a low-interest loan to pay off existing debts is the low-interest rate. With lower rates, you can reduce the interest you pay, and the amount of time it takes to pay it back.

Take note: Have student loans? Be careful. If you’re considering refinancing student loans, take some time to think it over. Student loans come with tax advantages. If you refinance with a loan, you will lose out on the ability to deduct your interest payments from your taxes. Also, if governments were ever to offer loan forgiveness in the future, your refinanced student loans would not qualify.

2. As an alternative to payday loans and credit cards

If you’ve ever been tempted by a payday loan or credit cards when you’re scraping by paycheque to paycheque, you know how both of these options can leave you much worse off than you were.

Sure, payday loans may be easier to get, and credit cards tempt you from your wallet, but both carry extreme risks if you can’t pay back the balance on time. Payday lenders can charge interest rates over 400% if you miss your payment. As for credit cards, if you miss three payments in a row, they can also up your interest rate. Credit cards are a great tool to access credit with, but not to borrow against.

3. Unexpected emergencies

Sometimes, life happens. And there’s not always enough money in an emergency fund to cover it. When the unexpected happens, having easy access to a low-interest loan comes in handy for:

• Emergency car repairs (for pricier work like replacing a transmission)

• Medical bills

• Urgent home repairs (such as a damaged water heater, replacing a furnace in the middle of winter or a leaky roof in the summer)

4. Finance a major one-time purchase

Not many of us walk around with the cash available to finance a home renovation or buy a car. A low-interest loan can make it easier to make a necessary one-time purchase. It’s important to consider whether your major purchase is a want or a need — although a loan is a good debt compared to the bad debt of high-interest credit cards, you are still adding to your overall debt. Here are some common one-time purchases you may consider taking a low-interest loan for:

Home renovations - If you lack equity in your home to qualify for a secured home equity line of credit, a low-interest unsecured loan may be your next best option to finance a home renovation project such as a kitchen renovation.

Buying a car - If you’re buying a used car from a third party, regular car financing isn’t an option, a low-interest loan comes in handy for transactions like these. You can use the loan’s proceeds for a cash withdrawal or issue a bank draft or cheque.

5. To finance a wedding

Weddings should be a joy-filled occasion. You shouldn't risk putting costly expenses on your credit card if you think you'll have a hard time paying it back on time.

Although a wedding is technically a one-time major purchase, it’s an entirely different creature than emergency car repairs or home renovations because they take months, even years to plan.

It's not unheard of to book a venue a year or more in advance; add to that a caterer, photographer, and the dress, and you could be shelling out money monthly for a year.

A low-interest loan makes it easier to manage wedding expenses and keep repayments manageable. A quick tip: consider setting up a separate free chequing account to hold the loan proceeds, payout its monthly payments, and use it exclusively for wedding-related purchases. 

The bottom line

At the end of the day, a personal loan can be beneficial. But the key is to remember that it does have to be paid back. Taking out a loan to consolidate debt may be a fantastic personal decision to help you get out from under a lot of high-interest bills. On the other hand, if you take out a loan to buy a car or throw the perfect wedding, you’re borrowing money that will have interest added to it. That’s when you need to decide if it’s a great choice or not. Always remember to use loans responsibly and not because your wants outweigh your needs.