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.
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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:
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.
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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:
7) Use Savings Or Investments To Pay Off Debt
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.