Equiloan

REDUCING DEBT IN A PANDEMIC

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With the second wave of COVID-19 cases, it’s safe to say many Canadians are struggling through the pandemic. Managing finances is hard enough and the idea of improving your financial situation or growing wealth may seem like a pipedream.

However, at Equiloan we would argue NOW is the time to start. Below are some tips that will help you reduce bad debt, optimise good debt, increase income streams and build long term wealth. .

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1. Consolidate debt: If you have more than 2 credit products that hold balances and have high interest rates, consolidate them on a low interest credit product to save money.

SCENARIO 1 – 2 credit products outstanding – Stop using the credit cards and target to pay them off in 3 years.

PRODUCT

APR

ORIGINAL DEBT AMOUNT

PAY PRINCIPAL AND INTEREST MONTHLY

TOTAL INTEREST PAID DURING THE 3 YRS 

TOTAL COST OF DEBT FOR THE 3YRS

Rewards Credit Card

19.9%

$3,000

$109

$920

$3,920 

Travel Credit Card

23.5%

$7,000

$265

$2,532

$9,532

Total

$10,000

$374

$3,452

$13,452

SCENARIO 2 - Consolidated the debt from the credit cards into a single loan with a lower APR.

PRODUCT

APR

ORIGINAL DEBT AMOUNT

PAY PRINCIPAL AND INTEREST MONTHLY

TOTAL INTEREST PAID DURING THE 3 YRS 

TOTAL COST OF DEBT FOR THE 3YRS

Consolidated Loan

6%

$10,000

$303

$926

$10,926 

RESULT: By consolidating debt and paying the principal and interest monthly, a $2,526 of savings is created.

2. Avoid Interest Only: Choosing an interest only payment option to pay down your credit translates into paying more in interest by the time the debt is paid off.

 

PRODUCT

APR

ORIGINAL DEBT AMOUNT

ONLY PAY INTEREST MONTHLY

TOTAL INTEREST PAID DURING THE 3 YRS 

TOTAL COST OF DEBT FOR THE 3YRS

Rewards Credit Card

19.9%

$3,000

$45.72

$1,645

$4,645 

Travel Credit Card

23.5%

$7,000

$124

$4,472

$11,472

Total

$10,000

$374

$3,452

$16,117

RESULT: When you choose an interest only payment option the additional cost is approximately $2,665.

3. Overpay: Take advantage of every opportunity to overpay any outstanding debt. Overpaying helps reduce interest on the loan and pays off the debt faster.

4. Request an APR reduction: Talk to your credit provider about your position and what you are trying to do. They will work with you to reduce the APR (Interest rate) on your existing credit product, if you request that help. If this is not an option then they will likely transfer you onto another product that charges a lower APR (interest rate), which will help you pay the interest rate down, faster.

OPTIMIZE GOOD DEBT

1. Re-invest your home: If you have a property where the value has increased, consider optimizing the equity to help grow the wealth within the property. By taking out equity to enhance your home the value of the property will increase. If you choose to sell your home in the future, you will have a better closing price.

2. Consider Leveraged Investing: Some banks offer Investment, RRSP and TFSA loans. The purpose of these loans is to allow consumers to invest the funds from the loan into an investment vehicle only, with the sole purpose of growing personal wealth. These products are good as long as the return seen within the investments are greater than the interest and payments of the loan

INCREASE INCOME STREAMS

1. Buy your retirement home: A lot of Canadians that bought properties 2014 or earlier have seen those properties increase in value. An option for a more comfortable retirement, would be to pull out enough equity to buy a retirement home and rent out the original property to generate enough income to cover the mortgage on your property. This is optimal for people who do not have a mortgage, though if you still have a mortgage this can be beneficial as well.

2. Earn from your skills: Leverage one of your personal talents to drive another income stream to help grow your wealth and reduce bad debt faster. Some activities that people have monetized are

• Private Tutoring

• Private catering (lunch, dinner, small parties)

• Utilize social media to teach health living, exercise, weight loss

• Set up a show on social media

• Write a book

• Develop an app

• Charge for training sessions or seminars 

The tips within this blog are here to guide you to explore options to enhance your personal position. Nothing within this blog is to be considered advice in any shape or form. If you require tailored advice, it’s recommended to connect with a Financial Advisor.