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How to finance renovations, car purchases and other projects without breaking the bank

10 December 2014 by National Bank

What projects would you like to undertake? Whether you want to buy a car, renovate your home or install a swimming pool in your backyard, the first step to succeeding is to evaluate your needs…and your budget.

How much will your project cost?

The scope of a project will determine the amount you need in order to achieve it. For example, if you add a room to your home, how big does that room need to be? Will you need to re-do the roof or demolish walls to get the job done? Do you need to install pipes or glass doors?

The first step towards financing a project is to accurately determine your financial needs, while integrating a little extra leeway into your budget for the unexpected. You should also estimate the portion of costs that you can cover without borrowing. Have you saved some money that could be used for your project?

If you want to finance the purchase of a car or pool, for example, you should make the same evaluations: Determine the amount you want to pay in respect to your needs.

Can you afford it?

Before going to the bank for a loan, you should realistically assess the monthly amount that you can spend on repayment of a new debt.

In order to make that assessment, create a budget. Here are some important rules to follow when building a budget that will provide you with a realistic picture of your financial situation, and your ability to borrow:

    • Take your lifestyle into consideration. If you like to go out, for example, include your entertainment expenses in your budget;

    • Provide a cushion for the unexpected. You should always have sufficient liquidity to meet your needs for up to six months. Unexpected events can come in the form of a job loss, a serious illness or an emergency repair to your home;

    • According to financial experts, you shouldn’t be spending more than 35-40% of your gross income on debt repayment. Of this percentage, the largest portion should be dedicated to mortgage payments. This usually leaves 5-8% for other loans.

    When assessing your application, lenders will also calculate your borrowing capacity and will want to determine whether or not your project will be profitable.

    For example, will renovations increase the value of your home?
    Armed with your own calculations, you’ll be able to present a realistic application, which is more likely to be accepted.

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    What type of financing should you use?

    Each type of project corresponds to a preferred method of financing, and it is essential to use the right form.

    When buying a car, credit cards are obviously not a good idea. Additionally, if you have access to a line of credit, you shouldn’t use it to buy a car unless you are expecting a large sum of money in the near future that you can use to pay off the balance.

    In all cases, make sure that the term of the loan does not exceed the life of the asset being purchased. If that is the case, you will be stuck paying off a balance for something that you no longer need or use.

    When buying a car, car loans are generally quite acceptable, whether offered by a dealer or your bank. Be aware that if you are offered a low rate or no interest rate, the lender will recover it in the selling price.

    When financing renovations, consider using a line of credit, or think about refinancing your mortgage in order to take advantage of current low interest rates.

    Advice and warnings

    In order to get the desired funding, while avoiding falling too heavily into debt, the following tips may help:

      • In order to determine if you can afford the monthly payments required by a loan, try setting aside the sum before contracting the loan, essentially doing a test run. If you put aside $350 a month, for example, you’ll know that similar payments can be acceptable. Furthermore, you will have accumulated a little bit of useful savings along the way!

      • When deciding if you need to finance a purchase, think beyond the monthly payments. Think about how you will use your purchase and don’t get reeled in by financing offers that are too good to be true!

      • Don’t fall into the common trap of believing that you can afford a purchase because you expect to be richer in a year or two;

      • Always pay attention to your credit and pay at least the minimum payment required on your credit cards. In the long run, you’ll find it easier to get a loan and you’ll get a better rate if your credit score is good.

      • Consider making weekly or bi-weekly payments instead of monthly payments. You will end up repaying your loan faster, with less accumulated interest.

      • Always assess your future needs. Will you need to re-roof your home, buy a new car or help your child pay for their education in the near future?

      To learn more:
      Tool for building a budget

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