Many Canadians end up with high-interest debt due to poor credit scores or inaccessibility to conventional loans. The cost of maintaining high-interest debt can be detrimental to your finances.
Banks increase or decrease lending rates depending on the current Bank of Canada’s policy interest rate. Due to high inflation rates and rising costs of living, the policy interest rate has increased to 3.75%. Consequently, the interest rate on your variable interest debt, such as a line of credit or even a car loan, may increase —as you may have noticed.
Also, if you are taking up a new loan, the interest rate will be significantly higher than it was just a year ago.
Higher interest on your debt means you are paying the bank more money towards the interest payments. Paying off your high-interest debt can help you save money in the long run.
Here are a few things you can do to reduce high-interest costs impacting your finances negatively.
Pay off existing high-interest debt
Now is a good time to prioritize paying off your debt if you already have a high-interest loan.
If you have a variable-rate loan, your interest payments will keep increasing as the bank’s lending rate continues to rise. Allocate part of your income to paying down your loan principal. If you receive a windfall of cash, such as a tax refund or a work bonus, you can pay off your debt completely using this income.
Negotiate your loan rates and terms
If your high-interest debt is weighing heavily on your finances and causing a cash crunch, you can call your financial institution to renegotiate your loan terms and refinance a loan.
Debt consolidation can be a helpful tool when trying to pay off your loans.
Ensure your new loan terms are favourable in the short and long term. Additionally, pay attention to your current loan terms to avoid high costs of loan prepayment and other breaches of contract penalties.
Explore more favourable loan options
Your local cooperative financial services or credit unions may offer you more favourable loan terms.
Unlike big banks, credit unions are non-profit financial institutions. They may be more flexible with loan requirements and can offer lower interest rates depending on your financial situation. Avoid high-interest loans like payday loans, unpaid credit cards, or loans from non-conventional lenders.
Avoid taking up more debt
Now, more than ever, loans are becoming more expensive due to higher interest rates. If possible, avoid taking up more loans. Seek other alternatives to settle your financial needs, such as falling back on friends and family.
Saving up an emergency fund can also help you avoid high-interest debt when you have unexpected expenses, such as a car or home appliance breakdown.
Finally, when managing debt, remember that your financial choices are connected. For example, using high-interest credit cards and not paying back when due can hurt your finances and credit score.
Prioritize paying off high-interest debt to free up cash for your other financial goals.