Will Higher Interest Rates Drive You Into Bankruptcy?
Most people have heard the term, ‘interest rate’, and most adults are likely to be paying interest on their accounts, but we don’t always realize the impact is having on our financial situation.
When you borrow money, it’s normally on the basis that you agree to pay it back with interest.
The amount of interest you pay depends on what the interest rate is.
As you might expect, the lower the interest rate, the less you would need to pay back in total, and the higher the rate, the more you’ll pay back overall.
The lender can decide what interest rates to offer, so the borrower is at somewhat of a disadvantage.
Although you could choose not to borrow money from a lender that charges high interest rates, what happens if all the lenders start charging similarly high rates?
If you’re unable to rely solely on your savings or your income, you may feel you have no other option than to borrow funds with a high interest rate.
What Happens When Rates Increase?
Waiting until lower interest rates are available might seem like a sensible option, but it isn’t always a realistic course of action.
If you need to access funds urgently, you may not be able to wait months or even years for interest rates to fall again.
Furthermore, if you have existing credit, an increase in interest rates could affect how much you have to pay back.
If you take out a loan with a variable interest rate, for example, this means the rate can change while the loan is active.
In interest rates rise, you’ll need to pay back more each month to cover the interest repayments.
If you continue to pay the same monthly amount, you’ll simply be paying less of the capital debt off as more will be required to cover the cost of the interest.
Who Sets the Interest Rates?
Lenders, like high street banks or payday loan companies, can set their interest rates at whatever they like, providing they don’t breach the relevant laws or regulations.
However, high street banks and similar organizations typically borrow funds themselves from larger entities, such as the Bank of Canada.
If the Bank of Canada increases their interest rate, smaller organizations will face higher costs.
In turn, they will increase their interest rates in order to recoup these costs.
Eventually, this cost is passed on to the consumer, which means that individuals will pay higher rates of interest when borrowing funds.
Will You Need to Claim Bankruptcy?
Although an increase in interest rates will put you under more financial pressure, it won’t necessarily mean you have to file for personal bankruptcy.
However, if you’re unable to make regular repayments due to rising interest rates, this could mean that you require some form of debt relief, such as filing for bankruptcy or making a consumer proposal.
If you’re experiencing financial problems and you want to know more about the debt solutions available to you, contact Bankruptcy Canada now at (877) 879-4770.