Has Paying Down Debt Become Easier?

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 which 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.

Paying down debt is easier with marketplace loans

Does it really work?

Assuming our credit score is in a decent standing, we cane 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 term 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 possible 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.

Related: Peer-to-peer lending comes to Canada

Final word

Paying down debt can be a lot easier with a marketplace loan, but that’s just part of the solution. If we find oursleves 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 plays a factor in deciding if your loan application is approved.

By | 2016-12-06T23:24:36+00:00 August 3rd, 2015|Debt, Personal Finance|

4 Comments

  1. Abigail @ipickuppennies August 4, 2015 at 5:29 pm - Reply

    I think the sheer amount of technology we have has made debt repayment easier. Not only do you have apps to track your spending and programs to help you create a budget, you have a whole supportive blogosphere of like-minded people to cheer you on and inspire you.

    • Barry Choi August 4, 2015 at 5:52 pm - Reply

      Abigail.

      Technology has definitely made so many things easier. That being said credit is so easily accessible that it’s even easier to increase our debt loads! I do like the idea that there are more options available to people who’re ready to take their money seriously.

  2. Sean August 13, 2015 at 6:06 am - Reply

    One can also use a line of credit at their bank – if I’m not mistaken, my line of credit interest rate is a bit lower than 5.6%. What’s the difference between using Borrowell and using the LOC?

    • Barry Choi August 13, 2015 at 8:28 am - Reply

      Sean,

      Yes a line of credit is a great way to consolidate debts. The main advantage of a marketplace loan is that it’s a fixed loan where you need to make regular repayments, a LOC you could abuse and add to your debt. Of course, if you don’t borrow more with your LoC and use it just to pay down your debts, then the interest rates with them are hard to beat.

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