I Lost My Job Thanks to Coronavirus, Should I Apply for A Loan?
The current situation here in Canada amid COVID-19 times is, well, pretty grim for many of us. As essential businesses shut down and the country debates a tighter lockdown similar to those in other nations around the world, more and more Canadians are losing their jobs and, with that, their incomes.
With no clear date of when things will return to normal and no easy prospects of finding further employment at this time, Canadians are starting to worry about their financial situation. Questions like “How can I afford my bills?” and “How will I afford food?” are becoming all too common. In these uncertain times, individuals are looking at their options and wondering if now is the time to apply for a loan.
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In these unprecedented times, changes are happening almost faster than we can keep track of. However, here is what we know at the time of publishing.
Due to closures and shutdowns, many Canadians have found themselves without work. According to the Globe and Mail, nearly 1 million Canadians applied for unemployment benefits from March 16-22 alone.
And as time passes and businesses continue to stay closed, we can only expect that number to rise. In fact, Canada expects to see an unemployment rate of 15% by the end of the year.
While these numbers are dire, it’s not surprising as lockdowns and restrictions get tighter across the country. And unfortunately, many of those people will not be eligible for
Amid all this uncertainty the Canadian government has announced a series of benefits available to individuals to help provide some financial assistance and relief during this time. These measures include Canada Emergency Response Benefits (CERB), Employment Insurance (EI), and Sickness Benefits, top-ups for GST credit and Canada Child benefits, mortgage deferrals and more.
Should I Get a Loan If I am Already Struggling Due to COVID-19?
If you find yourself currently struggling financially due to COVID-19 closures, then you may consider taking out a personal loan. Sit down and assess how much money you have (after scraping every option and minimizing expenses) and see how long that will carry you over. Create a very strict budget and then come up with the number you need to get you through what your savings, borrowing, and cutting costs can’t.
If your number is too big to loan from a friend or access elsewhere, you’ll need a loan. There are experts saying this will likely last until July and so you’ll want to make sure you can have all your expenses covered until then. But, you’ll also want to make sure you are able to pay it back, so don’t take too much, take only what you need.
Is it a good idea? That’s really individual as it is probably a better idea than withdrawing from your RRSP, but not better than taking from your Emergency Savings if you have one.
How Does a Personal Loan Work?
When you take out a personal loan you are borrowing money that you then agree to pay back over a set period of time. The full amount is due within the time frame and this is done by paying what you owe back in regular payments, referred to as installments. However, keep in mind that a loan is not “free” and you will also be charged interest and any applicable fees on the amount that you borrow.
Loan Rates Pre and Post COVID-19
Traditionally, interest rates for personal loans see a huge variation that depends on your lender’s terms and the credit score and debt amount you bring to the table when inquiring.
On the lower end, many of our recommended loan providers, like LoanConnect or Loans Canada, offer interest rates on loans at around 3%, however, they can also skyrocket to 46.96% depending on the lender and your history.
That being said, due to the economic stress occurring due to COVID-19, banks are cutting their prime rates in an effort to help Canadians. On March 27, 2020, the Bank of Canada cut its prime rate by 50 basis points to 0.25%. While there are several other factors that lenders build into their interest rates, the fact that the prime rate has been dropped will mean lower interest rates right now for personal loans.
What Can I Use a Personal Loan for Right Now?
Traditionally personal loans are used for things like home renovations, or to finance a car purchase. However, given the current situation, your financial needs are likely very different. Now is probably not the time to consider upgrading your home or planning a luxurious wedding. Instead, you’ll want to consider a personal loan if you need help in paying off credit card debt, consolidating other debts, paying rent, bills or any other expense you may be struggling to stay on top of during this time.
How Can I Know How Big of a Loan to Apply For?
Figuring out how big of a loan to take out right now is a tricky question as there is no firm timeline as to when things will go back to “normal”. In this article from the National Post, the government suggests that current measures, as they are now, will continue until at least July. With that in mind, you probably want to consider taking out enough to get you through until at least July and re-evaluate when the time comes.
Please keep in mind that during this time you should only be spending money on essentials; food, housing costs, necessary bills, etc. This is not a time for unnecessary purchases and random spending. Especially if you are considering taking out a loan. Your best bet is to sit down, make smart money moves and create a monthly budget that will allow you to calculate what you think that you need to get by until July. Remember, a loan does need to be paid back with interest, so make sure you are including that in your calculations.
Bank Loan vs Loan Providers
If you are looking to apply for a loan you have two options: go to a bank or use a loan provider.
People often think that going to a bank will give you better rates than a private lender, but that’s not always the case.
Many lenders will actually take your information and shop around different loan providers for you to help you find the best deal based on your needs and financial situation. This is a free service and for those just looking for a quote, you are under no obligation to move ahead.
Sure, it requires a bit more work and time compared to going to a traditional bank which is just a one-stop-shop. However, spending a little extra time to compare quotes to see if you can get a better rate is worth your while. That being said, at the end of the day there is no right or wrong choice. The best place to get a loan is wherever will approve you with terms that you can afford and work with.
What if I Already Have a Loan?
If you currently have a loan and are struggling to pay it back at this time due to a loss of income, then speak to your lender. Many lenders right are looking at their client’s position on a case-to-case basis and may be able to make adjustments such as reducing your interest rate or extending your terms.
For those applying for a loan during COVID-19 time, your rate will be lower now that it would have been prior to this. However, if something happens and your situation changes, for example, your spouse lost their job but you still had yours, and then you were also laid off a while later, speak to your lender.
The key here is not to leave it until it’s too late. If you know you are struggling and will continue to do so, reach out to your lender right away.
Alternatives to Personal Loans
It’s important to do your research before committing to a loan. You may decide a personal loan isn’t for you, and instead choose to opt for one of your many other options—like unemployment loans and personal loans geared specifically to people with bad credit, for example. The more you know about your best loan options, the more you’ll know about the loans you should avoid at all costs. Here are four other alternatives you should consider.
Ideally, you have an emergency fund with enough money to last you for a couple of months for a situation like this. Perhaps you have GICs, a HISA, or even a TFSA. If you are in need of extra finances at this time, these should be your first resort. The money is already yours, which means you don’t need to pay it back. Plus, there will be no (or very minimal in the case of certain GICs) withdrawal penalties.
Low-Interest Balance Transfer Credit Cards
Although it may not be the best time to apply for a new credit card, if you are struggling with credit card debt in particular, then consider switching over to a low-interest balance transfer credit card. These credit cards have lower than normal interest rates (ideal for new purchases) and generally offer extremely low (often 0%) interest rates for a welcome period of a few months. Make sure you understand the difference between balance transfer cards and personal loans before you sign up—both both have their benefits and drawbacks. Switching to a low balance credit card may be the leg up you need during this time to help catch up with debt without incurring additional interest.
Line of Credit
Another great option if you aren’t too sure about taking out a loan is to open a line of credit. Yes, it’s still borrowing money, however, unlike a loan, there is no set schedule in which you need to pay back what you borrowed. You just need to make, at the minimum, monthly interest payments. Interest is only calculated on the amount you borrow and you can treat a line of credit as revolving credit. Borrow-pay back- borrow again.
The interest charged on a line of credit is usually lower than what you would pay on a loan. However, because there is no fixed time to pay back the money, you may end up paying more interest over time. That being said, the Canadian government is looking at very low or even zero interest credit lines for households struggling during this time.
One of your first thoughts may be to withdraw from your RRSP. After all, it is your money, not the bank’s or a loan provider’s. However, as enticing as it may be to consider an early withdrawal from your RRSP, it is not recommended as it comes with hidden costs.
The first, and most obvious, is that you will be taxed at a very high rate. Not only do you get taxed on the withdrawal, but that money then also becomes part of your ‘income’ which means you will also be taxed on it again at the end of the year.
You also need to keep in mind that you will lose your contribution room. This is a big deal for those who still have years until retirement and time to build up their RRSP again. On top of losing the contribution room, by withdrawing from your RRSP early you also lose the tax-sheltered compounding aspect which, long-term, can mean a significant loss of money.
For these reasons, you should not consider withdrawing from your RRSP early unless you have exhausted all other options.
The situation right now with COVID-19 is unprecedented and things are constantly changing. If you have lost your job and are struggling or worried about finances, know that you are not alone and there are options and resources in place to help you get through this difficult time, as well as many different ways to borrow money. Take a second to seriously assess your finances and understand what kinds of loan terms you can afford and how much you’ll need to carry you through to July. Be frugal with your expenses, be diligent in your search for a lender, and stay updated on financial relief available that may be relevant to your loan.