Caplan Debt Solutions

What the Lower Interest Rates Mean for You

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What the Lower Interest Rates Mean for You

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The average Canadian household currently carries around $72,950 in debt, not including their mortgage. The high cost of living over the last couple of years and the rising interest rates have meant nearly 3 in 4 Canadians lives in debt.

So the Bank of Canada’s announcement lowering interest rates to 4.5% can only be good news, right? Yes, it may help reduce your debt burden, but there are a few things to be aware of.

The Hidden Dangers Behind the Lower Rates, Debt Consolidation Professionals Warn

The recent drop in interest rates might make you feel like you’re finally catching a break. However, this perceived relief can create a false sense of financial security. 

Lower rates can lead to complacency in managing your debt, as it might seem like your financial obligations are more manageable. 

There’s a temptation to take on additional debt because borrowing seems cheaper. You might consider upgrading your car, renovating your home, or making other significant purchases on credit. Whether or not interest rates fall further, you will find yourself with higher monthly payments at a time when the economy’s outlook is unclear

Lower interest rates don’t just affect borrowing; they also impact your savings and investments. The returns on savings accounts and low-risk investments like GICs (Guaranteed Investment Certificates) may decrease, slowing the growth of your nest egg. This reduction can hinder your ability to reach long-term financial goals, such as retirement or your child’s education fund. 

That’s all the more reason to be cognisant of your debt load.

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Don’t Expect Much (or Any) Reduction in Your Current Debt Load

Lenders set interest rates for these types of debt based on various factors beyond the national rate. Risk assessments, administrative costs, and profit margins play significant roles in determining the interest you’re charged. Since these elements are unique to each lender and borrower situation, the impact of lowered national interest rates on personal debts is often minimal.

Credit Card Debt

Credit card companies set their rates based on factors like risk and administrative costs, not directly on national interest rates. Even if there is a slight decrease, it may not significantly lower your monthly payments. Relying on minimum payments will keep you in debt longer and increase the total interest paid over time.

Auto Loans

If you already have an auto loan with a fixed interest rate, the recent changes won’t affect your existing payments. New auto loans might offer slightly better rates, but the difference will be minimal. 

Personal Loans and Lines of Credit

Fixed-rate personal loans you’ve already taken out won’t see any change in interest rates due to the recent cuts. Variable-rate lines of credit might offer a slight reduction in interest charges, but the savings may be offset by lender fees or changes in terms. To see if you’ll gain an advantage form the lower interest rates, check your financing agreement.

Financing for Household Appliances

Retailers often entice you with financing options for appliances and electronics, featuring fixed interest rates or promotional periods like “no interest for 12 months.” These deals are typically unaffected by national interest rate changes. Be cautious with such offers, as failing to pay off the balance within the promotional period can lead to high-interest charges retroactively applied to your purchase.

Travel Financing

Post-COVID revenge travel meant a lot of people took on travel debt. Travel loans usually come with fixed interest rates and are not influenced by the Bank of Canada’s rate adjustments. Even if your travel debt is on a variable rate, the 0.25% decrease in federal interest rates will not significantly lower your total repayment. 

Taking Control of Your Financial Future With an Experienced Debt Consolidation Team

If you’re feeling overwhelmed by your debt, don’t hesitate to seek help from financial professionals. Most people don’t realize that there are a wide range of options to reduce debt: 

Credit counselling – A credit counsellor can assist you in creating a realistic budget, provide tools for managing expenses, and offer support as you work towards becoming debt-free. 

Consumer proposal – A consumer proposal is a legally binding agreement between you and your creditors to repay a portion of your unsecured debts over a specified period, typically up to five years. It’s an alternative to bankruptcy that can reduce the total amount you owe while allowing you to keep your assets. 

Debt consolidation – Debt consolidation involves combining multiple debts into a single loan, usually with a lower interest rate. This simplifies your repayment process, as you’ll make one monthly payment instead of juggling several.

Bankruptcy – Bankruptcy provides a legal way to eliminate most of your debts and start fresh financially. While it can have significant implications for your credit rating and may involve the liquidation of certain assets, bankruptcy can offer relief when other debt reduction strategies aren’t feasible. 

Find Your Path to a Debt-Free Life With Caplan Debt Solutions

With combined experience of over 50 years, Caplan Debt Solutions has helped people and companies resolve their debt issues. You will work with the compassionate team who take the time to understand your needs and prepare tailored strategies to minimize your debt.

Schedule a consultation today and discover how you can be debt-free again.