Low Interest Loans

January 7, 2019

Things aren’t always the way they seem, especially with low interest loans.  The idea of low interest loans is attractive especially to people who are on the threshold of financial collapse.  We’ve previously blogged about low interest and how a low interest consolidation (into a mortgage) compares in cost to paying higher interest credit cards.  It turns out that aggressively paying credit card debt works out to be more cost effective than consolidating at far lower interest rates.

The attraction of low interest loans is sometimes more optical than practical, but they can be helpful on a cashflow basis.  Cashflow is only one part of an overall debt management plan, if you can cashflow your payments but never see an end to them you may be in a much worse situation than a person who recently filed for bankruptcy.

Interestingly the CIBC recently reported that almost half of Canadians are not staying on top of their debt payments, ironically that hasn’t slowed the CIBC down in issuing credit cards and other forms of credit.  The banks make borrowing attractive by offering longer term lending at low interest rates but think about what happens over the passage of time.  The actual amount of interest paid or payable is frequently far more that would be paid on the same loan at a much higher rate of interest and over a much shorter duration.

Mortgage debt is usually carried over 25-30 years and even at low rates the interest payable is very high.  This is especially so for chronic consolidators (those who consolidate debt at every mortgage renewal).  Historically, lower or preferred rates were (and still are) offered to top tier clients through the “private banker” programme.  Private banker clients are usually in the top 1% of income earners and get preferred interest rates in exchange for user fees and investment commissions – as grandma used to say, “what they lose on the roundabouts they make up for on the slides”.

The promise of future low interest loans in exchange for signing up for a higher rate loan today should also be taken with the proverbial “grain of salt”.  We hear about car dealerships promising low rates after making payments at a higher rate for an inaugural period – say one year.  The offer goes something like this, “you pay 17% for the first year but after you have made all those payments we will get the rate down to 9% for the remainder of the five-year term”.  Unless you have that clearly stated in writing don’t believe it.

Low interest loans are usually only available to people in the top tier, and even to them they are a lost leader, allowing banks to make up the losses in other product lines.  As with all borrowing “antennas up”.