While paying off your debts should always be a priority, the urgency is heightened as interest rates and the cost of living in Canada continue to climb. If you have high-interest debt, you need a strategy to lock in a manageable rate and make timely payments. If rates continue to increase, your monthly minimum payment may be far more, down the road.
In this post, we’ll discuss the detrimental effects of high-interest debt. In addition, we provide strategies that allow you to manage your debt now, so you aren’t overwhelmed in the future.
Interest Rates in Canada
While the Bank of Canada recently decided to hold interest rates at 5%, it’s very likely we will see rates rise again soon. The rate freeze is excellent news if you have a variable rate, as your mortgage payments won’t increase. However, the continued rise in interest rates affects the cost of living and can even increase the rates on high-interest credit cards, especially if you aren’t making your payment.
The Effect of High-Interest Debt
Regardless of the status of interest rates, high-interest accounts have a negative effect on your finances. For example, when you make a $1,000 payment on an account with 25% interest, it may be that only $200 goes toward the balance. Then, when you miss a payment, additional fees get tacked on the principal, with future payments going toward even less of the initial amount you borrowed.
A high-interest account, especially one that isn’t being paid off, damages your credit, reduces your savings and retirement, and lengthens your time in debt. In addition, being drowned in debt has a negative effect on your mental health. Financial insecurity creates a spiral effect, leading to depression and anxiety. According to a Money and Mental Health survey, 86% of the 5,500 participants with mental health issues said their financial situation worsened their mental problems.
As interest rates increase, the stakes become higher. In some cases, if you aren’t making your monthly payment on time, your interest rates can increase. So, you want to act as soon as possible to get on the repayment path.
Debt Management Strategies
Even if you aren’t financially capable of making your minimum payments on high-interest debt, you still have options.
Debt Restructure Plans
One of the most common ways to begin your path toward paying off high-interest debt is by restructuring your accounts. Depending on your situation, you can move forward with various restructuring plans.
- Debt consolidation loans – Converting multiple debts into one loan payment simplifies your repayment process.
- Home Equity Line of Credit – Borrowing money against your home so you can pay off high-interest debt.
- Balance Transfer – Moving an existing debt to another provider, ideally with a lower interest rate.
- Debt Settlement Plan – Settling with your creditor and agreeing on a lower payment and repayment schedule.
Understanding each type of restructuring plan is essential in finding the right plan for your situation. Taking out more loans can further damage your credit and continue the debt spiral even more, especially if you can’t make future payments.
Negotiating with Creditors
Creditors are motivated to settle debts when they believe it’s the only way they will get paid. Especially when your accounts are past due, negotiating a lower amount can reduce the time it takes you to pay off your debt.
In Canada, you are at an advantage when getting out of high-interest or unmanageable debt. You have access to what is called a consumer proposal. This formal agreement between you and your creditors, administered by a licensed insolvency trustee (LIT) and who is an officer of the court, could greatly reduce your balance owing. The process requires the LIT to investigate your affairs, assess your debt, and obtain the best possible return for the creditors. The trustee is paid a percentage of what they recover on behalf of the creditors.
The most significant advantage of a consumer proposal is you will stop interest accumulation. Once the proposal is accepted, your debts will stop accumulating, making them far easier to manage.
A consumer proposal is quite often the best way to to get out of debt quickly, while also returning to positive cash flow living, almost immediately.
Hiring a Debt Relief Company
When you have high-interest debt, the most important thing to do is take action. However, making the right debt management strategy can save you years and thousands of dollars. Therefore, hiring a professional debt relief company could be the most effective way to tackle your debt.
At Get Me Debt Free, we look at a variety of debt management strategies and we specialize in tailored solutions for each and every client. There are no proverbial cookie cutters in our toolbox. We believe this is the most efficient way for Canadians with unmanageable debt to overcome their financial situation. If you want to learn more, please contact us for a free consultation.