Debt repayment has become a top priority for Canadians in 2023. According to a recent poll by CIBC, 18% of respondents said they would prioritize paying off their debts over other financial goals, such as savings or reducing discretionary spending. With debt levels skyrocketing in recent years, it’s no wonder that Canadians are feeling the pressure to get their debt repayments in order.
Read on to know what rising interest and inflation rates mean for those who are in debt and why debt repayment should be a priority.
Increasing trend of Interest Rates in Canada to wrestle inflation
In an attempt to control inflation, Canada’s central bank increased its interest rate seven times in FY (Fiscal Year) 2022. This is the highest rate the bank has seen since 2008 and marks the quickest pace of rate hikes since the implementation of inflation targeting in the 1990s.
Showing Statistics (Source: Bank of Canada) – Interest rates increase from 0.25% to 4.25% in 2022
The impact of increased interest rate on Debt takers in 2023
As interest rates continue to rise, the financial burden on those carrying debt increases. In 2022, interest rates have been revised seven times and have increased by 400 basis points. With every increase in interest rates, the minimum monthly payments on loans and lines of credit also go up. This can make it very difficult for those struggling to make ends meet. In some cases, the increased payments may even cause them to fall behind on their payments, which can lead to late fees and additional charges.
For instance, if a person has a loan amount of $300,000 at the beginning of FY 2022, their monthly interest would be $62.5. However, due to the increase in the interest rate to 4.25%, the monthly interest for the same loan amount would be $1,062.5, resulting in an increase of $1,000 per month.
There are several reasons why Canadians should make debt repayment a priority:
1. To avoid paying more in interest: As interest rates rise, so does the amount of interest you’ll pay on your outstanding debt. By making debt repayment a priority, you can minimize the amount of interest you’ll pay and save money in the long run.
2. To improve your credit score: Your credit score is impacted by your ability to repay debt. You can improve your credit score over time by keeping up with your payments.
3. To free up cash flow: Reducing your outstanding debt can help improve your overall financial situation and give you greater flexibility with your finances.
Defaulting on debt can have serious consequences, including wage garnishment, legal action, and damage to one’s credit score. If you are struggling to make your debt payments, it is important to seek help before things get out of control.
Book a free consultation with a credit counsellor at D. Thode & Associates Inc., who will review your current situation and work with you to create a debt relief plan that fits your financial circumstances.