A few weeks back the Bank of Canada decided to cut interest rates for the second time this year. The fear was that Canada was near a recession and the lower rate would increase spending. Well, just 2 weeks later and it looks like we’re already in a recession. The lower rates will hopefully help businesses, but on the consumer level, we’re continuing to pile on debt.
Car and installment loans are the main reason why we’ve seen the country’s total consumer debt grow by $122 billion in the first quarter alone. We love to spend, and with interest rates being low; paying down debt has been a low priority for many, it’s probably encouraged many of us to spend when we really shouldn’t.
There is some positive news. Consumer bankruptcies are down, and we’re continuing to make our payments on time. With all the different debt repayment options available, paying down debt has never been easier.
Marketplace lending can help us reduce our debt
Marketplace lending, also known as peer-to-peer lending (P2PL) is relatively new the Canadian market but it’s a great way to reduce debt. Unlike a traditional loan, marketplace loans are a fixed-term product that encourages us to pay down our debts. It’s really not that different from a debt consolidation loan since it’ll allow us to pay off all other debts, and then all we do is make a single monthly payment.
“Technology is changing the way people use financial services,” says Andrew Graham, CEO at Borrowell. “Marketplace lending takes the “marketplace” approach used by companies like eBay and Airbnb to bring buyers and sellers together for the benefit of both. We’re doing that for borrowing – matching institutions looking to lend with people looking to borrow.”
Just recently, Borrowell, a Canadian marketplace lender announced that they’re lowering their lowest interest rate to 5.6% APR from the previous low of 5.9% APR. This comes after the company just hit $50 million in loan applications. With a fixed interest rate loan, our monthly payments will never go up. The other appealing thing for borrowers is the fact that we have the option to pay off our loans early without any penalties.
Does it really work?
Assuming our credit score is in decent standing, we can easily apply online and in just a few minutes and find out what rates are available to us. Rates are custom tailored for each individual, but more importantly, the interest rates charged will be lower than what we’re currently paying.
Credit cards charge an insane amount of interest. They do more harm than good since the minimum payment will increase our debt, not reduce it. If we owed $4,000 on our credit card with an annual percentage rate (APR) of 19.9% and made payments of just $135 a month, by the time our balance was paid off, we would have paid $1,560 in interest. However, with a marketplace loan, the same monthly payment on a $4,000 loan with a 12.8% APR on a 3-year term would cost us just $838.
Some people mistake marketplace lending as a payday loan all dressed up, but that couldn’t be further from the truth.
“The range of loan amounts, interest rates and repayment terms are all very different. Borrowell’s rates start from 5.6% APR” says Graham.” Payday lenders in Canada can charge rates much, much higher once fees are included–even 100% or more!”
What makes payday loans even worse is that they’ll pretty much lend to anyone no matter what their financial situation is. Marketplace lenders will assess if we’re able to afford the repayments over the term. Helping us pay down our debts is a priority for them.
What if I need the loan for something else?
Marketplace loans are geared towards people who want to pay off debt, but at the same time, it can technically be used for anything. If you’re expecting a lot of expenses in the near future e.g. for a wedding or a vacation, a marketplace loan can be appealing since the interest rates can be more affordable than say a credit card or possibly even a bank loan.
Think hard about what you spend your loan on. Sure you could take a vacation, but if you need a loan to take a vacation, that probably means you can’t afford to take a vacation.
Since each application is looked at on an individual basis, someone might be approved for a marketplace loan when they were rejected by their bank. Their intentions may be good, but banks can sometimes be difficult with their application process.
Paying down debt can be a lot easier with a marketplace loan, but that’s just part of the solution. If we find ourselves constantly getting into debt then we probably have other problems to worry about. Take the time to educate yourself about financial literacy so you can become smarter about your money.
Marketplace loans in Canada are only available to Canadian citizens in select provinces who have reached the age of majority in their home province, and they must have a credit history of at least 12 months. Besides your credit score; your income, borrowing history, and current loans play a factor in deciding if your loan application is approved.