5 Reasons To Reduce Debt, Despite Low Interest Rates

Low-interest-rates-reduce-debtInterest rates in Canada are at historically low levels, and it’s very possible that they will stay below normal levels for many years into the future.  Governments with massive debts can’t afford to let interest rates increase and governments want consumers to keep borrowing so they can continue to spend and fuel the economy.

So if interest rates won’t increase, does it matter that we are carrying high levels of debt?

Here is the typical borrowers thought process:

If I can afford the payments on a $100,000 loan at a 10% interest rate, I can just as easily afford a $200,000 loan at a 5% interest rate.

So is it safe to ignore debt as long as interest rates are low?

No.

Here are the top five reasons why even with low interest rates you should make debt elimination a priority:

  1. If your income drops, even a low interest rate mortgage can become unaffordable if you have severely reduced cash flow. With no debt, you can survive a drop in income.  With high debt, not so much.
  2. If you are carrying a balance on a credit card, you may be paying 19% interest, or more. If you have a finance company loan or a payday loan, you are probably paying a very high interest rate.  It’s not the interest rate that your friend is paying on his mortgage that matters, it’s the actual interest you are paying that you should worry about and take steps to eliminate.
  3. All debt squeezes your financial wiggle room. If you have no debt, it’s a lot easier to borrow if a need arises.  Need to borrow to help pay for your child’s education?  Want to borrow to renovate your home?  If you are already maxed out, forget it.
  4. Debt is stressful. No debt is worry free.  I’ve never met anyone who loses sleep at night worrying about not having enough debt.
  5. Interest rates will eventually go up. Perhaps not today, or even this year, but eventually they will increase.

Don’t use low interest rates as an excuse to borrow.  Instead, take advantage of low interest rates to aggressively pay off your debt, so you are well positioned for your future.

Category: Debt Management | Tagged in:

Jan 13, 2015

About J. Douglas Hoyes

J. Douglas Hoyes, BA, CA, CPA, CBV, CIRP is a Licensed Insolvency Trustee and the co-founder of Hoyes, Michalos & Associates Inc., one of Canada's largest independent personal insolvency firms. As an expert in debt management, Doug has been helping people deal with debt for more than 20 years.

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