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How to Manage Debt Load With Changing and Fluctuating Interest Rates

Fluctuating interest rates can have a profound influence on household finances. When interest rates rise, borrowing becomes costlier, and monthly expenses and debt can increase dramatically. Here’s how to navigate this financial maze and manage your debt load strategically.

a young couple with child juggling major expenses


How Interest Rates Affect Various Types of Loans

Interest rates impact different loans in different ways. Fixed-rate loans are insulated from interest rate changes for the duration of the term, while loans with variable rates change according to the rate of the day:


  • Variable-rate mortgages Variable-rate mortgages fluctuate with changes in the market's prime rate. As interest rates rise, homeowners with variable-rate mortgages will see an increase in their monthly payments. Some experts predict some mortgage holders may see monthly payments increase as much as 40 per cent, straining household budgets and leading to potential insolvency issues and possible personal bankruptcy.

  • Fixed-rate mortgages Fixed-rate mortgages offer stability, with interest rates locked in for the entire loan term. While these mortgages shield borrowers from short-term rate fluctuations, they can be affected during renewal or when securing new loans.

  • Car loans For those with existing car loans, the impact is minimal as the interest rates are fixed when the loan is signed so that monthly payments will remain the same throughout the term. However, rising interest rates mean higher costs for new borrowers.

  • Student loans Federal student loans typically come with fixed interest rates set by the government, shielding students from market fluctuations. Private student loans, however, may have variable interest rates, making them susceptible to changes.

  • Credit card debt Credit card debt is highly sensitive to changes in interest rates. Most credit cards come with variable interest rates tied to benchmark rates. As interest rates rise, many credit card charges will increase, amplifying the cost of carrying a balance.

  • Lines of credit Lines of credit may offer more flexibility than traditional loans, but their interest rates often fluctuate with market changes. Variable interest rates on lines of credit mean borrowers may find it much more challenging to repay.


a close up of a person's hand holding a debit credit card

Tips To Manage Debt Load When Interest Rates Rise

Managing debt can be a daunting task, but there are a variety of strategies that can help you get back on track and achieve financial freedom. Here are some effective actions you can take:


Generate funds

  • Liquidate assets. Sell non-essential belongings to raise cash for debt repayment, particularly high-interest debts.

  • Tap savings. If you have savings set aside for emergencies, evaluate whether using a portion of those funds makes sense to pay down outstanding debts. While it’s crucial to maintain an emergency fund, strategically using savings to reduce high-interest debts can lead to significant interest savings over time.


Reduce the interest burden

  • Negotiate rates. Contact your creditors and explore opportunities to negotiate lower interest rates. Creditors may be willing to adjust rates, especially if you have a good payment history. Lowering interest rates can substantially ease the burden of debt repayment.

  • Fix variable rates. If you have variable-rate loans, consider locking in a fixed rate to provide stability amid fluctuating interest rates. Fixed-rate loans offer predictability, making budgeting for consistent monthly payments more manageable.


Manage loan terms

  • Extend amortization. Extending the amortization period on your mortgage can lower your monthly payments, immediately relieving your budget. While this may increase the total interest paid over the life of the loan, it can help manage cash flow effectively.

  • Make lump sum payments. If possible, and the terms and conditions of your loan, prioritize making lump sum payments towards your debts to significantly reduce the principal amount and save on long-term interest.


Prioritize debt repayment

  • Target high-interest debts. Prioritize high-interest debts and focus on paying them down first. Tackling debts with higher interest rates helps minimize the overall interest payable and accelerates the journey toward financial freedom.

  • Focus on debt with variable rates. Given the unpredictability, prioritize paying off variable-rate loans like credit card balances before fixed-rate loans.


Increase income and reduce expenses

  • Boost income. Explore ways to increase your income, like taking on additional work or finding new revenue streams.

  • Cut expenses. Evaluate your budget and identify areas where you can cut back to free up more money for debt repayment.


a woman reviewing financial statements and income taxes to determine a debt management solution

Seek Professional Help From A Licensed Insolvency Trustee

Before your debt load becomes unmanageable, seek the help of a financial expert like a licensed insolvency trustee (LIT). A professional can help develop a financial strategy to pay down debt so that you can face increases in interest rates without fear of losing your assets.


Find a New Beginning – Get Debt Help In Eastern Ontario

At D. & A. MacLeod Company Ltd., a licensed insolvency trustee can help you develop a strategy to pay down debt to protect you from fluctuating interest rates. Contact us today to schedule a confidential, no-obligation consultation. Visit one of our in-person offices or book a virtual appointment anywhere in Canada.



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