Nearly half of Canadians are struggling to pay for daily expenses — is applying for a personal loan the right thing to do during a moment of financial crisis?

What should I use a personal loan for during a crisis?

Traditionally personal loans are used for things like home renovations or to finance a car purchase. However, if you’re in a financial crisis, these things are probably not top of mind.

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 essential expense you may be struggling to stay on top of.

Getting a loan: banks 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 to help you find the best deal based on your needs and financial situation.

If you’re in a time of crisis, it’s likely that you may have a poor credit score. In this case, a lending platform like Loans Canada might be the way to go. Loans Canada matches you with borrowers suited to your needs and specializes in matching people with poorer credit scores.

In the end, the best place to get a loan is wherever will approve you with terms that you can work with and afford.

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Alternatives to personal loans

It’s important to do your research before committing to a loan. 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.

Emergency funds

Ideally, you have an emergency fund with enough money to last you for a couple of months in an emergency situation. Perhaps you have GICs, a HISA or even a TFSA.

If you are in need of extra money, this 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.

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.

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.

RRSP

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.

Sources

1. Financial Consumer Agency of Canada: Consumer Vulnerability: Evidence from the Monthly COVID-19 Financial Well-being Survey (November 2022)

2. Statistics CanadaNearly half of Canadians report that rising prices are greatly impacting their ability to meet day-to-day expenses (Aug 15, 2024)