The best way to borrow money

Should I get a loan or a line of credit?

These are two forms of borrowed money that accomplish the same thing. The difference is that a loan will eventually be paid off to the point where you owe nothing, then the loan doesn’t exist anymore.

For every dollar you pay down a line of credit, however, a dollar becomes available to you to borrow again, without having to consult your lender.

Which one is right for you? If you don’t trust yourself not to dip into a line of credit for fun money, stick to a loan with a fixed term.

Will I qualify for more money?

Whatever your bank’s website says, you may end up paying a different rate of interest based on your individual money situation. The bigger the risk you seem, the more you’ll pay.

Worried that your already-heavy debt load might turn off potential new lenders? They’re typically leery of folks who have
a poor credit score (below 600 points) or who are so deep in debt that repayments would equal more than 40 percent of their gross annual income.

“There is no hard and fast rule, though, and some lenders may be willing to take more risk than others,” says Patricia Lovett-Reid, a Certified Financial Planner and senior vice-president at TD Waterhouse Canada. For those who are in too much debt to get help from a bank, seeing a credit counsellor is the next step (see 5 Signs You’re in Financial Trouble).