Interest rates are frequently speculated about in the media and by financial analysts, but what do they mean for the average person? The impact of interest rates can vary, from significant to virtually nothing – mostly depending on which types of debts you have.
Vancouver Licensed Insolvency Trustee Blair Mantin joined Global News to talk about what Canadian consumers should know about interest rates and debts, including how and when they can impact you.
Watch the clip here and read more below:
How Interest Rate Hikes Impact…
Credit Card Debt: Small rate hikes normally aren’t passed on directly to consumers.
Most credit cards terms are set without regard for prime interest rates. If your only debt is on credit cards then you’re not likely to be impacted by an interest rate hike, but:
- The real danger of interest rates in relation to credit card debt is that using credit cards is already very expensive if you don’t pay your entire balance off in full each month – even small balances can grow hugely thanks to normal credit card rates.
- A debt as low as $6,000 can take up to 40 years to clear if only the minimum payments are made each month!
Did you know? If you miss payments on your card your bank’s interest rate may increase by up to 5% as a result of delinquency!
Vehicle Financing: Most auto loans are set up with a fixed interest rate that won’t change automatically if interest rates increase.
An interest rate hike shouldn’t cause a direct increase on your monthly vehicle financing payment:
- Payments under a contract with a fixed rate won’t change at all.
- If you have a contract with a variable interest rate, normally a rate-hike will mean extending the time you’ll make payments so that the additional interest rate costs are paid.
Where an interest rate could impact your vehicle financing:
- Trade-in time: If you decide to trade-in your vehicle before the end of your financing contract, you may absorb the ‘negative equity’. Many people also consolidate other debts into new vehicle loans.
- New loans: Loans applied for following an interest rate hike will probably have higher interest rates, and as a result – an increased cost to borrow.
As many as 85% of Canadians use financing to purchase vehicles – the average financing term is now over 6 years!
Lines of Credit: Higher payments will be charged, with a direct and immediate impact to consumers.
Because lines of credit are normally variable rate loans, an interest rate hike will result in an immediate increase in the payments you need to make. This can be very stressful if your finances are already stretched and you are only paying interest on your line of credit.
For someone paying interest only, they have likely already seen a very significant increase in required payments, and this will continue as rates escalate higher.
Mortgages: Homeowners with variable rate mortgages are the most likely to feel the impact of an interest rate hike.
With a variable rate mortgage, your mortgage payments will be increased – you could see the increase as soon as the month following a rate hike.
With a fixed rate mortgage, your payments won’t increase – but you could expect a new higher interest rate upon renewal of your mortgage.
What Can You Do About Rising Interest Rates?
The single biggest things you can do to prevent being impacted by increasing interest rates: pay down as much of your debt as possible.
- If you have a mortgage, consider your options for locking in at a fixed rate. Shop around and compare the best rates available, you may even want to consider engaging a mortgage broker.
- Are you able to adjust your budget to allow you to make bigger payments on your debts?
- Are you already over-extended trying to meet your minimum monthly payments? If so, consider consolidating and writing off some of your debt – talk to a Licensed Insolvency Trustee (at no cost) about your options.
Understand and choose the best debt management option for your situation. Book your confidential free debt consultation with a Sands & Associates professional today.
