Erase Your Debt Fast By Lowering Interest Rates

eraseyourdebtfastbyloweringinterestrates.jpgIt's a fact, many Canadians are deeply in debt!

Not just mortgage debt either, but consumer debt like credit cards, car loans, payday loans, and lines of credit. According to The Globe And Mail, non-mortgage debt is on the rise again coming in at an average of $21,428 per person!

If you include mortgages, then the numbers get bigger, MUCH bigger. We're talking $1,529,000,000,000 (1.53 trillion) spread across all Canadians, which works out to 1.63 dollars for every dollar of disposable income earned. That means someone who takes home $50,000 in income after taxes would have $81,500 in debt.

If you're in debt, I hope you're working hard to get out of it as fast as you can!

Avoiding debt isn't always possible because of unfortunate circumstances, but it really isn't a burden you want to carry with you for long either. You see, once debt rises to a high enough level, it becomes crippling and the interest payments make it almost impossible to make any progress on the principle amount owed. Some people will recommend cutting your expenses to the bone, others will suggest a second job, while still others will say to pay yourself first.

These are all good suggestions, but I think the best place to start is cutting and juggling your interest rates as much as possible so you immediately have more cash flow to pay down your loans much faster.

First - A Warning

Some of the methods I'm going to speak about here can make it seem like you all of a sudden have extra money and breathing room, which can prompt some individuals to increase spending and run up even more debt. That's exactly what you want to avoid!

If you don't have the discipline to handle more available credit, then many of these strategies are not for you. You might be better served by that second job or cutting up all your plastic and trying a debt snowball.

How To Reduce Your Loan Interest Rates

There are a lot of ways you can lower your interest rates. If you already have a low credit score from missing your payments, you may not qualify for all of them. However, you should be able to find something here that can help you along.

1) Balance Transfer Promotions - As Low As 0% Interest

One of the quickest and easiest ways to eradicate a high interest rate of 20% or more, is to get a credit card that has a balance transfer promotion that can be as low as 0% interest for a set period of time.

I know, getting a credit card to solve your credit problems sounds counter intuitive. But, after taking my above warning into account, it actually makes a lot of sense.

In short, you apply for a new card that is known to have a 0% interest rate and, once approved, you transfer as much of your high interest debt to that credit card as possible. Your interest rate immediately drops to 0% for the promotional period, allowing you to increase your payments by the potentially hundreds of dollars you would otherwise be paying in interest.

There are a few important caveats to keep in mind though:

  • Never ever use your new low interest rate credit card to make ordinary purchases. You should use it for balance transfers alone. Without getting into complicated details, new regular purchases made after your balance transfer can be subject to regular interest rates of 20%+ until you've paid off your entire balance, including all of the balance transfer. Just don't do it!
  • Once you pay off your main credit card or other loan, make sure you don't start spending on it again now that you have a low balance!
  • Set yourself a calendar reminder so you know when your 0% interest rate expires and have a plan for paying off your remaining balance (possibly with another low interest rate promotion) at the end.
  • Maxing out your new credit card with balance transfers can have a temporary negative impact on your credit score. If you are committed to paying off your balance, your credit score will rebound quickly as it is paid down and you continue to make your payments on time.
  • Make sure the card has no annual fee. Most balance transfer focused cards don't have an annual fee, but there are a few that do.
  • There is usually a balance transfer fee of up to 1% of the amount transferred charged by the credit card. You will quickly pay for this with your interest savings, but it is something to be aware of.

Current Best Balance Transfer Credit Card Deal:

0% Interest For 12 Months

2) Negotiate A Lower Rate With Your Lender

Above all things, even interest, your lender wants you to eventually pay them back. If you default, they end up holding the bag and lose a bunch of money. You can definitely use that fact as leverage and accordingly most lenders are open to lowering your rates.

If you've struggled with your balance for a while, give your credit card issuer or lender a call and explain to them you are struggling to pay down your loan because of the high interest rates. Ask them if there is something they can do to lower your rate permanently, or even temporarily, to help you pay them back faster.

This may or may not work, but be persistent and try talking to a few people if the first person you speak with isn't willing to negotiate. Finally, mentioning that you are considering opening up a new credit card, doing a balance transfer, and closing your account with them won't hurt in convincing them to act.

3) Get A Home Equity Line Of Credit (HELOC)

If you don't already have one, a HELOC is a great way to lower your interest rates. With current typical interest rates being 3-4%, you can pay off your high interest loans with your HELOC through online banking or by writing a cheque and start saving a bundle right away.

To get a HELOC, you need to own a home, have paid some off your mortgage off, and have decent credit. The bank will use your home as collateral if you can't eventually repay the loan. They also do have the right to call the loan and make you pay it back at any time, but no bank that wants to keep their customers will ever do this so it isn't much to worry about.

4) Give Group Lending A Try

Group lending is a relatively new concept in Canada, but has been very successful in the USA. The basic premise is that investors looking to lend money are matched up with borrowers who need to borrow money at interest rates that are typically much lower than standard credit card interest rates.

Grouplend offers rates ranging from 6.3% all the way up to 17.5% depending on your credit worthiness, loan amount requested, and several other factors. Loans start from as little as $1,000 and range all the way up to $30,000 on the high end. The length of the loan is always 3 years.

I gave the Grouplend quote engine a test drive myself by filling in my details and requesting a $12,500 loan after spending some time reading through their site to understand better how everything works. It offered me a 3 year loan at 6.68% resulting in a monthly payment of $383.11, not bad. If I wanted the full $30,000, then they upped my interest rate to 9.25%, so spend some time adjusting the slider to find an amount and an interest rate that works for you.

If I had some high interest debt, then I would jump all over that rate for sure as it seems much lower than most unsecured loans I could get elsewhere and I wouldn't have to go through a loan interview or complicated application process to get it. I started going through a similar loan application process with RBC, CIBC, and President's Choice Financial for comparison's sake and was immediately turned off by their shoddy user interfaces and lack of transparency. There was no indication if I could easily back out of the application or if checking my rate would affect my credit score (with Grouplend it doesn't until you actually finalize the loan).

But when will you receive your money? Well, after you finalize your loan details, you'll have to provide them with some photos of a few pieces of ID, proof of income, a void cheque for the initial deposit and subsequent payment withdrawals, and bank account statements (they have an easy system in place for doing all of this). All told, you can typically complete the entire process and have the money in your account within 24 hours.

Get Your Own Quote:

See what interest rate you qualify for here

5) Use A Regular Line Of Credit

A standard line of credit can have much higher interest rates and those rates can fluctuate based on your credit score because they often aren't backed by collateral. It doesn't hurt to try though if the other options above don't work for you and you're paying more than 10% on some of your other loans.

Make sure you check with a few banks and lenders to make sure you are getting a decent rate because almost every financial institution offers some kind of personal loan product.

6) Get A Low Interest Rate Credit Card

Low interest credit cards are different than balance transfer credit cards. You don't get the short term amazing rate, but what you do get is a very reasonable ongoing low interest rate.

Most standard and rewards credit cards have interest rates topping 20% that will sometimes rise by 5% or more if you miss a few payments in the same year. Low interest rate credit cards have rates that are permanently as low as 10%, a significant savings!

Current Best Low Interest Credit Card Deal:

0.99% Interest For 6 Months - 11.99% after 6 months

7) Use Savings Or Investments To Pay Off Debt

You want to be careful about dipping into your investments or emergency fund to pay off debt, but sometimes it really makes the most sense.

You'll want to make sure you have a plan B if you have a true emergency, but paying huge interest on a credit card or payday loan while sitting on excess money in your savings account or investments doesn't make a lot of sense. There aren't a lot of safe investments out there that pay more than 10% interest reliably so guaranteed interest savings are a great investment.

You also may be taxed on whatever interest you're earning with your other investments, whereas debt repayment savings aren't subject to any tax!

8) Skip Payments On Your Mortgage Or Car Loan

Many mortgage or car loan contracts have a built in option to skip payments. These are sometimes called "payment holidays" and allow you to take a break on your payments for a month or two.

If you have high interest loans, chances are your mortgage or car loan interest is much lower than that. If you are eligible to skip some payments, you can take that money and apply it to your high interest loans and start saving the difference in interest payments on that amount immediately.

Even better, if you used to make extra payments on your mortgage before you fell on bad times, some mortgage lenders will let you skip payments for as long as you want until all that extra money you gave them is used up. So if you made $10,000 in extra payments, you can continue to skip payments until it adds up to $10,000. Call your lender to see if they offer this.

9) Consider Getting A Consolidation Loan

There are a lot of debt consolidation loan companies out there preying on people with bad credit. I don't have a lot of experience with these companies, but it wouldn't surprise me if some of them are rather shady by charging hidden fees or offering uncompetitive interest rates.

Getting a consolidation loan also has the possibility of impacting your credit score because you often have to pay off and close your other credit accounts along with going through a credit check to qualify for the new loan. Make sure you get all the details from the new lender and ask lots of questions. Read the fine print!

However, some of the big banks offer consolidation loans as well and there are some advantages to getting one:

  • All your other balances are combined into one lump sum so you only have to worry about paying one bill.
  • You can establish a set timeline to be debt free which gives you a very real goal to work towards and keep you accountable.
  • The interest rate, while not as low as most of the other options above, will often be lower than the existing interest rates you may be paying.

10) Pay Your Family, Not The Bank

Mixing up family and finances can be a really bad idea and has the potential to damage relationships. However, if you are serious about eliminating your debt and your family knows you can be counted on, then it can make sense to request a lower interest rate loan from them and pay them back over time. Proceed with caution!

Have You Ever Done A Balance Transfer?

I've never personally done a balance transfer myself because I've been fortunate enough to avoid high interest debt. However, I did once apply for the MBNA Platinum Plus credit card thinking I would use it to invest in something with a guaranteed return to make some extra cash. I still have the card actually, but I never did use it because I couldn't think of many safe investment opportunities that were worth doing.

First published: July 14, 2014

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Comments

Debs @DebtDebs.com's picture
Yes, I have done many balance transfers. We had a snafu with our recent one which will be fully paid next month. It was an 11 month payoff timeframe. I forgot that we had used the car to pay for our CAA membership last year and this January CAA automatically charged again to that card. Yeccch! I paid that charge off right away but it didn't matter. The way that they calculate interest meant that we paid about $20 more in interest due to that wayward charge, over the series of the next months. If it had been a higher charge it would have been a lot more. Very important caveat you mentioned there and we got burned by it.
July 15, 2014 @ 8:51 am
Stephen Weyman
Stephen Weyman's picture
Yes, it sucks when you get snagged by something like that. Fortunately, $20 won't break the bank for you and I'm sure you saved WAY more than $20 by doing the balance transfer in the first place. Thanks for sharing your story!
July 15, 2014 @ 10:12 am
CanadianDaniel's picture
Very useful article -- thank you Stephen Just wanted to add that I can phone up TD client services and ask about their current balance transfer offers. Sometimes they even waive the 1% admin fee, and the lower interest rate saved me a whack of money as you point out. Also, TD Emerald is a negotiable low APR card with rates from TD Prime + 1.5% to 12.75% depending on your credit history. Mind you there is a $25 annual fee, but I was offered 4.9% about 6 months ago when I spoke with TD. That's outstanding for unsecured consumer credit.
July 15, 2014 @ 9:11 am
Stephen Weyman
Stephen Weyman's picture
That's also some very useful information - thanks! Getting your bank to waive the admin fee is a great tip. The TD Emerald card sounds great too because, like you say, Prime plus + 1.5% is a GREAT rate for unsecured credit. Probably best for those with a really good credit rating so they can qualify for the lowest rate.
July 15, 2014 @ 10:14 am
Sherri
Sherri's picture
What about delaying property taxes ? it works like a low interest loan until you move. you just need to still have a child living at home. I suspect this is just another way to get further in debt though :-(
July 15, 2014 @ 9:59 am
Stephen Weyman
Stephen Weyman's picture
I didn't know you could do that Sherri. I wonder if that option is available everywhere. It's probably location-dependent. If you make sure you take the money you would be paying in property taxes and pay down high interest debt, then it could work. But, as you say, you need to be careful not to use it as a means to just get deeper in debt.
July 15, 2014 @ 10:16 am
Tamara
Tamara's picture
I have a joint RBC Student loan Credit line with my daughter that has been sitting maxed out for 4 years. We are just paying 4% interest or a reduced interest and loan protection while she is still in school but it never reduces anything. She now also has large OSAP debt. How can I reduce the RBC debt and start paying it down?
September 03, 2014 @ 1:17 am
Stephen Weyman
Stephen Weyman's picture
Well, a 4% interest rate is nothing to sneeze at so making an effort to reduce the interest rate may not be that beneficial. It is a first step you could take to save some money right away and apply that savings to the balance. However, what you need to do is find extra money somewhere. That means reducing your expenses as much as you possibly can (check out my Bills section for some tips there), budgeting and tracking your spending so you can see where you are spending the most, making some sacrifices, and most importantly finding a way to earn a little extra money. Take on a side job that generates a few hundred dollars a month and apply all of that to the balance to get it paid off. All that said, since this is money spent for HER education ... shouldn't she be the one trying to pay it off once she is out of school and working?
September 03, 2014 @ 12:08 pm
Miriam
Miriam's picture

I have had a major debt for several years now that I have cut in half by doing balance transfers, paying twice the minimum payment and moving it when the promotional period ended. Not the fastest way to get out of debt but it has been pretty painless and low cost. I schedule the payments in my online banking to make sure I don't miss one and I never use the 'balance' card for anything else. One of the cards I have used for this has consistently raised my limit so now I have only one balance card. It was a bit of nuisance when I had 3 but with automatic scheduling of payments it was fine.

May 21, 2015 @ 10:06 am
Stephen Weyman
Stephen Weyman's picture

That's definitely one way of doing it Miriam. Low interest balance transfers allowed you to chip away at your debt slowly while still using your cash flow for other things. I can't believe you were able to get 3 credit cards in the mix on this though, having so many maxed out credit cards would really hurt your credit rating I would think. Not only did they not limit your credit, but they kept raising it too. Must have been because of your great payment history.

Thanks for sharing your story!

May 23, 2015 @ 8:49 pm
susan
susan's picture

i have used the low interest transfer credit cards in the past and it has worked well- but MUST be aware of the dates!!
Question: in BC with a child living at home, property taxes can be deferred. I did this for a few years, then sold the house and paid off the debt painlessly. Does anyone know if the taxes have to be paid back once the child reaches a certain age? I have looked on line and cannot find info- Thanks!

May 24, 2015 @ 2:23 am
Stephen Weyman
Stephen Weyman's picture

Yes, keeping track of the dates when managing balance transfers is of utmost importance. You need to get organized if you are going to do this.

I have heard of deferring property taxes but that isn't something I have any experience with myself. Hopefully someone else will chime in.

May 25, 2015 @ 9:57 am

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